“…tax bills will go up even though real market values declined again as of January 2011, the date of record for valuations, and were down at least 20 percent from their peak in 2008.

You can thank Oregon’s tax system for that.

In the ’90s, Oregon voters passed two constitutional amendments limiting growth in property taxes. One essentially divorced real market values from so-called assessed values. The lower value is used to calculate the taxes you owe.

The second amendment in 1997 capped property tax increases to 3 percent a year, though it exempted remodeling, new additions and new voter-approved levies from that cap. That measure also cut tax bills overall.

Market values skyrocketed after that while assessed values bumped up at a more modest rate. By 2008, real market values across the state were 86 percent higher than assessed values, according to the Oregon Department of Revenue. And though market values have declined since then, they still remain about one-third higher than assessed values in Portland’s urban counties. “

In general, this topic is covered in section 108 of the Internal Revenue Tax Code.  Mortgage debt forgiven via a short sale or foreclosure can be excluded from taxable income so long as it meets a set of rules.  CLICK HERE to read a print off directly from the 2011 CCH US Master Tax Guide about these rules.  The mortgage debt must have been qualifying acquisition indebtedness (any “cash-out” will be included in taxable income) and it must have been secured against the tax filers primary residence.  This provision is set to expire in 2012.

Also, in section 108 of the IRC it states that debt discharged as a part of a court approved Chapter 11 bankruptcy and/ or debt discharged when the taxpayer is insolvent outside of bankruptcy is also excluded from taxable income.  I’m sure I am missing a lot of details so feel free to comment below if there are any important provisions I neglected to mention.

From this we can deduct that if a mortgage was used to acquire rental property or was used to pay-off consumer debt then any discharge of this debt will be included in a taxpayers gross income for tax filing purposes unless they are insolvent.

• Points: In general points on a refinance are deducted on a pro-rated basis over the life of the loan.  For example, if you paid $3,000 in points on a 30-year mortgage then $100 ($3,000/ 30 years) would be deducted each year in addition to the qualifying interest you paid.
• Per Diem Interest: Chances are at closing you paid some interest on the new mortgage you took out.  So long as your new mortgage is replacing qualified home acquisition debt or home equity debt (which it is in most cases) then this interest is tax deductible and you should have received a 1098 from the company you refinanced with.  If you’re looking at your final HUD-1 settlement statement this amount is shown on line 901.
• Property Taxes?: Depending on the time of year that you closed your refinance you may have paid property taxes directly to the county your home is located in.  In Oregon this would only impact homeowner’s that refinanced in September -November.  This would also show up on your final HUD-1 settlement statement.

There are some fairly obscure rules regarding points if you refinanced with the same lender that your previous loan was with.  Be sure to speak with your tax professional as I am not a licensed tax preparer.

In fact, if a homeowner had mortgage debt waived as a part of a short sale then they could actually have taxable income to claim.  In this instance I would recommend speaking with a tax professional BEFORE you ever put your house up on the market.

BTW, HERE is a link to my post from August 2008.

HIGHLIGHTS

Two-year extension of all current tax rates through 2012

Temporary modification of Estate, Gift and Generation-Skipping Transfer Tax for 2010, 2011, 2012

AMT Patch for 2010 and 2011

Extension of “tax extenders” for 2010 and 2011, including:

Temporary Employee Payroll Tax Cut

FULL SUMMARY

Reductions in Individual Income Tax Rates through 2012

Education Incentives Extended Through 2012

Extension of Certain Expiring Provision for Individuals through 2011

Alternative Minimum Tax (AMT) Relief

Temporary Estate Tax Relief and Modification of Gift and Generation-skipping Transfer Taxes

Temporary Extension of Investment Incentives

Extension of Certain Expiring Provisions for Businesses through 2011

Extension of Unemployment Insurance

Temporary Employee Payroll Tax Cut

This prompted me to go to wikipedia and read about Oregon’s landmark property tax legislation that was passed in the 1990′s.  Among other things measures 5, 47, and 50 limited property tax growth by 3% per year.  Therefore, if a person owns a home and it doubles in value their property tax bill can only rise by 3% per year (unless they made significant property improvements.  This explains why homes with the same market value can have drastically different property taxes.  If one home has been lived in continuously by the same person for 20 years then beginning in the 1990′s their property taxes could only rise by 3% despite the fact that on average their home’s value likely increased by 4-5% per year.

However, if an identical home across the street was bought and sold multiple times over the same 20 year period their tax bill would have adjusted to the market because when the property changes ownership the 3% limitation doesn’t apply.