No sooner has the country decided its politicians, including its Commander-in-Chief, these politicians are now forced to decided on the €fiscal cliff€, as this topic is hotly debated in the halls of Congress. But what are the implications of the fiscal cliff locally, especially for New Jersey homeowners?

1) Expiration of the Mortgage Debt Relief Act:
Congress passed the Mortgage Debt Relief Act of 2007, as a temporary salve to the incipient housing crisis that faced the nation. What it allowed was an exemption from homeowners to pay taxes on the remaining balance of their mortgage when the home was foreclosed or sold via short sale. This Act is set for expiration on December 31st of this year and presents looming dark clouds for many homeowners on the near-term horizon. For example, in 2013, as more adjustable rates reset to possibly spiked levels, foreclosures are expected to rise precipitously. In 2012, New Jersey was ranked as 38th out of 50 on the number of foreclosed properties on their books. That number is expected to rise by 140 percent however. But if the Mortgage Debt Relief Act is eliminated, homeowners who have their homes sold short, will then have to pay Federal income taxes on the amount that is forgiven. This would lead to banks from not approving short sales and would most likely mute the recovery in housing in New Jersey.
2) Increase in Capital Gains:
Currently, the long-term capital gains tax rate is at 15%, but is set to jump to 20% at the beginning of 2013. This increased tax rate will diminish the profits made from home sales, and will also diminish the motivation to sell in 2013, as higher taxes will have to then be paid. However, the sale for primary residences are exempt ($250,000 for individuals, or $500,000 for a married couple filing jointly) from this. This will slow down the recovery in the higher-end housing market.
3) Elimination of mortage interest deduction
As the mortgage interest deduction costs the United States Treasury close to $100 billion annually, the federal government certainly has incentive to allow this important deduction to expire. However, for both the existing and the new homeowner, the elimination of this deduction is extremely costly. This would lead to thousands of dollars in additional taxes to millions of American households and could lead to a rise in personal bankruptcies as many households are already on the brink of financial collapse. Perhaps even more ominous is that one of the great incentives of buying a home and becoming a homeowner would then be gone. Renting, living with the in-laws might suddenly become more favorable options and the recovery in the New Jersey housing market would not just suddenly stop dead in its tracks, but most likely, fall of a cliff.

1. Increase in mortgage insurance costs: On January 1, this mortgage insurance tax deduction is set to expire, which will slightly raise costs for those who put less than 20% down and are required to purchase mortgage insurance.
2. Reduced housing demand and construction: Most experts predict the combination of tax increases and spending cuts will push the economy back into recession. This means both new construction and demand for existing housing will wane, quickly reversing the six-month old housing recovery.
3. Dramatic reduction in short sales: Failure to reach a budget deal could mean the elimination of the Mortgage Debt Relief Act of 2007, which allows borrowers to avoid paying taxes on the amount of forgiven debt. If eliminated, homeowners who complete a short sale would have to pay income tax on the amount of debt relief. This would deter banks from approving short sales and could weaken home price gains and slow the housing recovery.
4. Less capital flows to real estate: If lawmakers don't act, the capital gains tax will increase from its current 15% to 20% at the start of the year. This increased tax would affect profits made from property sales, a possible deterrent to investing in real estate. The sale of primary residences are exempt from this--up to $250,000 for individuals or $500,000 for a married couple filing jointly.
As Congress struggles to pull the country back from that so-called fiscal cliff, homeowners who owe more on their mortgages than their house is worth are facing a cliff of their own.
€Now we're not certain whether they're going to extend it and I'm not sure how much attention is being paid to it, because we are dealing with the fiscal cliff situation,€ said Jim Cardinal, Syracuse Securities Loan Officer.
Congress passed the Mortgage Debt Relief Act of 2007 during the early days of the housing crisis. It exempts homeowners from having to pay federal taxes on the balance of their mortgage after a foreclosure or short sale. It's going to expire on December 31st and could mean big trouble for a lot of people.
€Even if $100,000 of your mortgage was written off, now you have to pay taxes on that $100,000. It could push you into a different tax brackets, because it adds to your income. These people are trying to get out of being underwater and it's just pushing them deeper into the underwater situation because they now have this debt with the IRS as well,€ CPA Alexis Meeks said.
The fear, if the act isn't renewed, is that it will cause more struggling homeowners to file for bankruptcy rather than work out an agreement with their lender and the worry then is it will continue to drag down a still anemic economy.
Meeks said, €If the act goes away and you're stuck underwater, financially, bankruptcy is going to be one of your only options unless you can claim that you're insolvent and therefore, some of that debt can be alleviated.€ Last month, attorney generals from 43 states sent a letter to Congress asking for the act to be extended.