Impact on critical real estate tax breaks by the American Taxpayers Relief Act

Impact on critical real estate tax breaks by the American Taxpayers Relief ActCongress reached an agreement in the “fiscal cliff” negotiations, and President Obama signed the American Taxpayers Relief Act into law on January 3, 2013.  Many critical laws where preserved for those that own real estate.

The American Taxpayers relief Act brings back the “Pease Limitation”.  The new law reduces high income earners itemized deductions by 3% of the amount their adjusted gross income (AGI) exceeds the threshold amount.  The Pease AGI thresholds are $250,000 for single taxpayers and $300,000 for taxpayers filing jointly.  For example, an individual with an AGI of $350,000 would be $100,000 over the threshold so their deductions would be reduced by $3,000 which is 3% of $100,000. In addition, no matter how high a taxpayer’s AGI, the Pease reduction cannot exceed 20 percent of the amount of itemized deductions otherwise allowable.

The exclusion of the gain on the sale of personal residence remains unchanged.  When you sell your personal residence the amount from gain that can be excluded is up to $250,000 for single taxpayers and up to $500,000 for taxpayers filing jointly.  You must have lived in your home for two of the five years prior to selling. 

The home mortgage interest deduction remains unchanged.

The Capital Gains rate remains at 15% for those earning less than $400,000 (individual) and $450,000 (joint). For higher income earners any gains will be taxed at 20%.

The Mortgage Forgiveness Debt Relief Act of 2007 has been extended for one year through 2013. Homeowners who experience a debt reduction through the short sale process or loan modifications on their principal residence during 2013 may exclude up to $2 million of forgiven debt on their taxable income.

Deduction for Mortgage Insurance Premiums to the Federal Housing Administration and private mortgage insurers has been reinstated through 2013 for those making below $110,000.  This provision expired at the end of 2011, but is now extended through 2013 and made retroactive to cover 2012.

The 15 year straight-line cost recovery for qualified leasehold improvements on commercial properties has been reinstated through 2013.  This credit expired at the end of 2011, but is now extended through 2013 and made retroactive to cover 2012.

The first $5 million dollars in individual estates and $10 million for family estates are exempt from the estate tax.  For estates in excess of the exemption the Estate Tax Rate is now 40%, that’s up from the previous 35%.

The 10% Energy Efficiency Tax Credit up to $500 for various energy-saving improvements to a principal residence has been reinstated through 2013.  This credit expired at the end of 2011, but is now extended through 2013 and made retroactive to cover 2012.

Check with your trusted tax advisor to see how the above guidelines apply to your situation.

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