Fiscal Cliff Avoided: What it Means for Housing and Home Builders

The fiscal cliff, an economically damaging set of tax hikes and spending reductions scheduled to begin in 2013, has been avoided (for now) and that is good news for housing  in the short-run.

The enactment of H.R. 8, the American Taxpayer Relief Act of 2012, will extend permanently most, but not all, of the 2001/2003 tax cuts. The legislation prevents a fiscal drag of approximately $600 billion in 2013, which would have been large enough to push the current weak economy into recession. That in turn would have reduced demand for both owner-occupied and renter housing and threatened the ongoing recovery for home building.

That outcome has been prevented, although future fiscal policy debates loom on the horizon. For example, a legislative fight over the debt ceiling and the delayed sequester will take place in February. And 2013 may be a year in which comprehensive tax reform is under legislative consideration.

But for now, the following items in H.R. 8 are of interest to housing stakeholders and home builders:

Business Tax Items

  • Permanently extends the 2001/2003 tax rates for adjusted gross income levels under $450,000 ($400,000 single); good for small business and home builders, 80% of whom are pass-thru entities who pay taxes on the individual side of the code
  • Permanently extends the Alternative Minimum patch; again, good for small business owners who are frequently at risk of paying AMT
  • Permanently sets the parameters of the estate tax; positive for family-owned construction firms; codifies the 2010 $5 million exemption amount (indexed to inflation) and a 40% estate tax rate
  • Extends present law section 179 small business expensing through the end of 2013; offers cash flow and administrative cost benefits for small firms
  • Extends the section 45L new energy-efficient home tax credit through the end of 2013; allows a $2,000 tax credit for the construction of for sale and for-lease energy-efficient homes in buildings with fewer than three floors above grade

Homeowner Tax Items

  • Extends through the end of 2013 mortgage debt tax relief; important rule that prevents tax liability from many short sales or mitigation workouts involving forgiven, deferred or canceled mortgage debt
  • Deduction for mortgage insurance extended through the end of 2013; reduces the cost of buying a home when paying PMI or insurance for an FHA or VA- insured mortgage; $110,000 AGI phaseout remains
  • Extends the section 25C energy-efficient tax credit for existing homes through the end of 2013; important remodeling market incentive, although the lifetime cap remains at $500.
  • Reinstates the Pease/PEP phaseouts for deductions; for married taxpayers with AGI above $300,000 ($250,000 single), the Pease limitation reduces total itemized deductions by 3% for the dollar amount of AGI above the thresholds. This is a negative change for some high cost areas, but should only have small impacts. Example, a married household with $350,000 AGI would be $50,000 above the limit and must reduce their Schedule A total by $1,500 raising their taxes by about $500. Only a share of that would be due to the MID.

Multifamily Tax Items

  • Extends the 9% LIHTC credit rate for allocations through the end of 2013; absent the credit fix, the LIHTC program would suffer a loss of equity investment for affordable housing projects
  • Extension through the end of 2013 of base housing allowance rules for affordable housing

Also noteworthy are items that are not in H.R. 8, including an itemized deduction cap or a defined fast-track tax reform process. Nonetheless, the return of the Pease rules suggests that items like the mortgage interest deduction will be under debate in 2013.

The resolution of the fiscal cliff now gives way to a series of mini-cliffs due to the need to raise the debt ceiling, establishing government spending levels and deal with the sequester. Over the long run, the future of housing demand, and interest rates in particular, will be affected by how Congress and the President solve the nation’s long-run deficit challenges.

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35 Responses to Fiscal Cliff Avoided: What it Means for Housing and Home Builders

  1. Thank you. Very concise explanation especially as related to housing.

  2. M/I Homes says:

    Reblogged this on My Home – A Blog from M/I Homes and commented:
    What the “fiscal cliff” means for housing…

  3. [...] On January 2nd, the NAHB Chief Economist shared this excellent summary of H.R. 8 and what it means for business, homeowners and housing in general. You can read the post here. [...]

  4. [...] Congress and the President agreed to a fiscal deal at the beginning of the new year, which is fairly positive for housing and home builders. The new law permanently extends the income [...]

  5. Reblogged this on Burks Investment Group: Redeveloping Houston and commented:
    This is quite interesting.. Soon if your not investing you will be loosing greatly

  6. [...] solve the nation’s long-run deficit challenges.View this original post on the NAHB blog, Eye on Housing. Posted: Saturday, January 05, 2013 9:53 PM by Janet & Graham Ford Filed under: Tax credit, [...]

  7. [...] View this original post on the NAHB blog, Eye on Housing. [...]

  8. joeloomer says:

    The interest deduction is one of the biggest incentives for buyers – even if its not their top reason for buying. In place since 1913, I’m surprised it always ends up on the chopping block.

  9. [...] View this original post on the NAHB blog, Eye on Housing. [...]

  10. fiscal cliff says:

    [...] challenges. — RISMEDIA, Monday, January 07, 2013 View this original post on the NAHB blog, Eye on Housing.Copyright© 2013 RISMedia, The Leader in Real Estate Information Systems and Real Estate News. All [...]

  11. [...] Update: January 14, 2013 – Many of these items were extended by the legislation that prevented the “fiscal cliff” at the end of 2012.  Click here for details on extension of items like the PMI deduction. [...]

  12. [...] Spending on home improvements dipped 0.7% in November, adding to the 1.9% contraction (revised downward from a 1.8% gain) reported for October. Expressed as a 3-month average, nominal spending on remodeling activity has hovered around a 5-year high for the past few months. Going forward, as part of the fiscal cliff deal, the tax code section 25C retrofit tax credit was ex…. [...]

  13. [...] View this original post on the NAHB blog, Eye on Housing [...]

  14. [...] despite the temporary sunset of a commonly claimed energy-efficiency tax credit for existing homes (that credit was extended in the fiscal cliff deal retroactively). For 2013, NAHB forecasts additional 2.4% growth, with 1.7% for [...]

  15. [...] lower interest rates, increasing numbers of refinancings, a lower homeownership rate, and the fiscal cliff deal all have worked to lower the budget size of the [...]

  16. [...] lower interest rates, increasing numbers of refinancings, a lower homeownership rate, and the fiscal cliff deal all have worked to lower the budget size of the [...]

  17. [...] developments have typically been associated with a decline in the personal savings rate. Due to the Fiscal Cliff, the data do not show this impact for the last quarter of [...]

  18. [...] developments have typically been associated with a decline in the personal savings rate. Due to the Fiscal Cliff, the data do not show this impact for the last quarter of [...]

  19. [...] developments have typically been associated with a decline in the personal savings rate. Due to the Fiscal Cliff, the data do not show this impact for the last quarter of [...]

  20. [...] the resolution of the Fiscal Cliff situation in January, the payroll tax cuts of previous years ended. While it is uncertain the degree to which this will [...]

  21. […] developments have typically been associated with a decline in the personal savings rate. Due to the Fiscal Cliff, this relationship has been disrupted for the last two […]

  22. […] developments have typically been associated with a decline in the personal savings rate. Due to the Fiscal Cliff, this relationship has been disrupted for the last two […]

  23. […] developments have typically been associated with a decline in the personal savings rate. Due to the Fiscal Cliff, this relationship has been disrupted for the last two […]

  24. […] today, with a 30% credit and $1,500 limit. Those rules have since been pared back during successive extension efforts. The current form of the credit expires at the end of […]

  25. […] With the government shutdown/debt ceiling conflict resolved, at least for the next few months, it is a good time to revisit the policy debate that preceded it – the fiscal cliff. […]

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