We all know that Supply is quite limited across many Bay Area neighborhoods; however, what I have not seen addressed is the influence of the "Fiscal Cliff", which I believe you should get ahead of due the out-of-the-ordinary disruption that may take place. The battle of â€œTax Increases vs. Entitlement Reductions" will be UGLY!
Case in point:
Tim Geithner: Obama 'Absolutely' Prepared To Go Over Fiscal Cliff http://www.huffingtonpost.com/2012/12/05/timothy-geithner-fi
Here are a few key housing market influencers to keep your eye on as you ponder how to best move forward:
1) The Mortgage Debt Relief Act of 2007 (and CA's companion Act) is set to expire at the end of 2012. Obviously, these Acts reduce the amount of Federal and State tax income, and no matter our personal opinion about whether this Act helps or hurts the Housing Market, the fact is it reduces Federal/State tax income; therefore, itâ€™s a target easily taken away by non-action.
2) The Mortgage Interest Tax Deduction is also on the table. Currently, as you well know, mortgage interest is a tax deductible item. This isn't the first go-round where elimination/reduction has been discussed. Sure, NAR is lobbying to keep this deduction around as a main incentive for home ownership. Would an erosion (i.e. setting a lower maximum allowable deduction on primary and second homes) or outright removal of the deductibility slow the housing recovery? Probably so.
3) Section 121 of the Internal Revenue Code is also probably attracting attention.
Generally, under Section 121 of the Internal Revenue Code, a Homeowner(s) can exclude up to $250K for those filing a single return and $500K for those married filing a joint returns if they:
-Owned the home for at least 2 years during the 5-year period ending on the date of the sale (ownership test),
-Used the home as his or her principal residence for at least 2 years during the 5-year period ending on the date of the sale (use test); and
-Did not exclude gain from the sale of another home during the 2-year period ending on the date of the sale.
Might this also be a target?
4) Federal Capital Gains Taxes are increasing from 15% to 20% on January 1, 2013. Even if we assume Section 121 of the Internal Revenue Code is left unscathed, saving $5K for every $100K over the $250K per person exclusion is something I might want to protect.
I'm more conservative when it comes to financial decisions especially when I know higher taxes are coming down the road. I would list my home ASAP and try to close escrow before the end of the year so you can retain the old Capital Gains Tax rates (and gladly reapply the savings to rent while looking for my next home) as well as avoid all of the future "disruption" hitting the fan.
By the way, you will put yourself in a better competitive purchase position if you have cash from the sale of your home as well.