2 ways the fiscal cliff could affect homeowners

If you're a homeowner and watching the news about the looming fiscal cliff, take a seat and pay attention because this is important.

No doubt you've heard about this fiscal cliff we're headed for if the government can't agree upon a new set of tax policies for the nation. While they are busy playing chicken with our wallets and their political careers, let's discuss how eliminating certain tax breaks can possibly affect you if you are a homeowner.

There are two ways: mortgage interest tax deductions and the mortgage tax relief on properties purchased via short sales.

Mortgage interest tax deduction

While it seems like this deduction has been on the chopping block over the last few years, this may become a seething reality for many homeowners. This is due to the fact that the deduction is set to expire and many homeowners will find themselves up a financial creek if this happens.

Homeowners could get hit especially hard on their 2012 tax returns, losing both the ability to write off mortgage insurance premiums and energy-efficiency improvements to their homes, tax experts said. - Huffington Post

.... many middle-income taxpayers see mortgage interest deductions as the only break they get. Press Enterprise

If you're like many homeowners, one of the major pulls in buying a home is the mortgage interest tax deduction and that may no longer be an option.

Mortgage tax debt relief

This form of tax relief comes into play in a scenario where you are selling a home that's underwater and the seller purchases the home via short sale. Whatever the amount you're short to the bank (hence the term short sale) is forgiven. But it doesnt end there. Without the tax debt relief, the IRS treats the forgiven amount like cash income even though no cash is exchanged. This results in a 1099 being sent to your home with you being responsible for the taxes associated with the amount forgiven based on your tax bracket.

Case in point: When Jeff Shingledecker put his home up for a short sale last April, he sold it for $105,000, leaving him with $118,000 in unpaid loan debt. When the bank forgives his debt, under the Mortgage Forgiveness Debt Relief Act of 2007, he won't have to report that $118,000 as income. After the first of the year, however, others forced into a short sale situation will get a shock: Any forgiven mortgage debt on primary residents, according to the IRS, will be considered taxable income. They will receive a 1099-C from the bank, and so will the IRS, showing the cancelled debt, and the resulting taxable income. NY Post

As you can see, very real financial consequences await us if our elected officials can't figure out how to meet in the middle and compromise on certain tax policies.

What are your thoughts on the looming fiscal cliff? Are you prepared or is this political jest?