Senate bill would preserve key housing tax policies

Mortgage insurance premium write-offs, debt forgiveness amid possible extensions

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The rap on the current Congress is that it can’t overcome partisanship, can’t move bills, can’t do diddly-squat on budgets or tax policy. That reputation is richly deserved and has hurt the national economic recovery and done nothing to help housing.

But now and then, something odd happens. Republicans and Democrats come together and agree on legislative proposals that have the potential to stimulate economic growth and directly assist millions of taxpayers who are also homeowners. The Senate Finance Committee — one of the two key tax-writing bodies on Capitol Hill — did precisely that before heading home for vacation with a strong, 19-5 bipartisan vote on legislation extending or reviving 50-plus tax code provisions, several of which have important implications for housing.

The bill would preserve the mortgage debt forgiveness tax exemption that is scheduled to expire Dec. 31; bring back the popular home energy efficiency improvement write-offs that expired last December; revive the now moribund tax deduction for mortgage insurance premiums paid in connection with FHA, Fannie Mae, Freddie Mac, VA and USDA Rural Housing low down payment programs; and extend the alternative minimum tax (AMT) "patch" retroactively for 2012 and continue it into 2013. Without the patch, millions of small-business owners and professionals are likely to pay higher federal income taxes this year and next.

The Senate committee’s bill is expected to hit the full Senate floor for a vote — likely in favor — after the Senate returns Sept. 10. Then it goes to the House, where it could either be taken up in the following several weeks or left for action after the election. Since the Senate’s vote represents the first positive, bipartisan move for real estate on a tax bill in years, here’s a quick overview of what it would do if it makes it out of the House in roughly similar shape and goes to the president for signature.

  • Mortgage debt forgiveness. Since early this year, I have received what must be several hundred emails from homeowners and Realtors asking essentially the same question: Could Congress be so dumb as to let the vitally important current tax code exemption for homeowners who’ve had their principal mortgage debts reduced by lenders expire? Could the federal government insist, in effect, that the Internal Revenue Service hit people when they’re down by treating the amounts forgiven in loan modifications, short sales, foreclosures and deeds-in-lieu as ordinary income, subject to crushing tax burdens?

As a matter of fact, the answer is yes. There are members of Congress who view the Mortgage Debt Forgiveness Act of 2006 as just another form of government bailout — forcing taxpayers who never fell behind on their loans to subsidize homeowners who stopped paying their mortgages, for whatever reason.

Political analysts including Douglas Holtz-Eakin, chief economic adviser to John McCain’s 2008 presidential campaign and a former director of the Congressional Budget Office, told me earlier this year that extension of the debt forgiveness law is "not a sure thing" by any means, and could easily become a victim of the end-of-the-year battles over the federal debt, deficit and budget — the "fiscal cliff" when the Bush tax cuts expire and heavy expenditure reductions are imposed on the defense budget and social programs.

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Sen. Max Baucus, chairman of the Finance Committee, expressly sought to insulate issues such as mortgage debt forgiveness from the expected year-end craziness by including it in the extender bill that just passed. If the National Association of Realtors can redouble its successful lobbying efforts in the House, Baucus’ strategy just might work. Thousands of underwater owners heading for foreclosure or seeking principal cancellation through the $25 billion, multistate robo-signing settlement certainly have good reason to hope so.

  • Energy efficiency write-offs. Remember those federal tax credits that homeowners could get when they installed new energy-conserving windows, doors, roofs, heat pumps, insulation and the like? Well, they expired last year and currently are unavailable for tax year 2012. But the Senate committee’s bill would bring them back for this year and through 2013. Not a game-changer, perhaps, but definitely a money-saver to large numbers of homeowners and a plus for the environment.
  • Mortgage insurance premium write-offs. This is another tax benefit that expired last December, but has special significance for a key segment of the housing marketplace: first-time buyers, minorities, and moderate-income buyers who lack big down payment cash. Under previous tax law, buyers who paid FHA or private mortgage insurance (PMI) premiums, VA guaranty or USDA Rural Housing fees were able to deduct them — just like mortgage interest — if their incomes did not exceed specified thresholds ($100,000 for married taxpayers, $50,000 for single filers, with a graduated phaseout up to $110,000 and $55,000, respectively). In the most recent year when IRS data was available, 2009, homeowners claimed $5.5 billion in deductions.
  • AMT "patch" extension. The alternative minimum tax "patch" that has spared large numbers of small-business owners, Realtors, investors and others from higher tax bills no longer is in force. It expired last December. The Senate bill would revive it for 2012 and next. If that effort fails, some estimates indicate that as many as 25 million additional taxpayers could be hit by the AMT — not a welcome development in a sluggish economic environment.

Bottom line here: The fact that Sen. Baucus was able to weld together a lopsided bipartisan majority in committee to support key tax extenders bodes well for possible Senate approval sometime next month. Beyond that, the bill could become another element in what could turn out to be a grotesque game of partisan chicken in December.

But let’s think positively. If the case for bipartisanship on a carefully limited piece of tax legislation was convincing enough for Republicans and Democrats in the Senate, maybe there’s hope that we’ll see the same in the House.

Ken Harney writes an award-winning, nationally syndicated column, "The Nation’s Housing," and is the author of two books on real estate and mortgage finance.

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