Without this save, huge tax burdens could be heaped on already-distressed homeowners who are working out loan modifications, executing short sales or going through foreclosure. This piece of tax code, enacted in 2007, was designed to save homeowners from being taxed (as ordinary income) on principal balances that are written off via loan mods, short sales, deeds in lieu of foreclosure–and foreclosures themselves.
In other words, if a lender wrote off $200,000 to facilitate a short sale, the seller would have to pay income taxes on that “gift”–even as they are likely moved into even higher tax brackets. Ditto for principal written off through loan modifications, deed-in-lieu and foreclosures. In many cases, these homeowners have already lost (and cannot deduct) down payments, costs of home improvements and other investments made in the home.
The deductibility of mortgage insureance premiums on federal tax returns was also saved for those with adjusted gross incomes less than $110,000. Retroactive to 2012 and deductible through 2013, this allows qualified home buyers to deduct, along with mortgage interest, all private mortgage insurance premiums (PMI).
Finally, San Diego homes will continue to benefit from energy-efficient windows, better insulation and other energy-saving features as tax credits ranging from $200 to $500 are offered to homeowners making these improvements. Other tax incentives are offered to builders, contractors and appliance manufacturers who meet certain energy-related standards.
In short, these provisions will benefit San Diego real estate at least for another year as distressed homeowners are allowed to shed mortgage debt they can no longer carry–without the added burden of taxation.