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Would Solomon Approve of the Fiscal Cliff Deal?

SS logo and graphicAt the last minute, some lawmakers blinked and others stood firm, and on New Year’s Day, a deal was struck that averted the nation’s headlong rush over the “fiscal cliff.” Although King Solomon’s position as absolute ruler of his kingdom made those kinds of negotiations unnecessary, the monarch nevertheless clearly understood the importance of compromise and of making equitable decisions – as shown by the often-repeated story of his decision to cut a baby in half to fore its mother to step forward. Would Solomon have approved of the last minute deal that ended the impasse?

In terms of the deals provisions to shore up the struggling housing recovery, the King might well have noted a certain measure of prudence and equity – two of the key virtues mentioned in his Proverbs. With key provisions to help property owners still in place, the deal’s stance on mortgage interest tax deductions and mortgage debt relief offers some benefits for both homeowners and income property investors.

The mortgage tax deduction, which allows borrowers holding mortgages on both residential and investment properties to deduct the amount paid annually for private mortgage insurance – one of the most prized tax breaks among the many afforded to property owners. This deduction, along with others for property maintenance and expenses, contributes to the long-term return on a property investment.

The fiscal cliff deal also extended a major tax break on mortgage debt forgiveness for one year -– a provision that touches investors indirectly by affecting the supply of available houses on the market. Under the provisions of a law signed in 2007, debt relief on loan modifications, foreclosures and short sales were not taxable. Those breaks, set to end in 2012, were extended for one year under the new deal.

In 2012, short sales – where a homeowner sells a house for less than the value of the mortgage with the permission of the lender – surged, thanks to expanded assistance programs for struggling homeowners. A repeal of the tax breaks associated with short sales and other avenues for avoiding mortgage default could have limited the number of short sales and other avenues for avoiding foreclosure. The continued availability of tax relief for homeowners trying to avoid foreclosure through a short sale may put more properties on the market.

The combination of these measures to keep some relief in place for distressed homeowners is expected to keep the number of foreclosures down, thus giving the slowly recovering housing market a boost. Home prices should also rise as a result of continuing those benefits to mortgage holders.

For investors following Jason Hartman’s strategies for increasing wealth through real estate, the preservation of the mortgage interest deduction means a tax-year advantage. But keeping tax breaks for mortgage debt relief may have the effect of limiting the number of properties available for purchase at low foreclosure prices for the near future. King Solomon most likely never faced a fiscal cliff. But in the deal that emerged from the current one,the king might have seen some evidence of his key virtue of prudence.

The Solomon Success Team

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