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You are here: Home / CA Real Estate / NO MORE CALIFORNIA STATE TAX ON FORGIVEN DEBT IN SHORT SALE, FORECLOSURE of LOAN MODIFICATION

NO MORE CALIFORNIA STATE TAX ON FORGIVEN DEBT IN SHORT SALE, FORECLOSURE of LOAN MODIFICATION

April 13, 2010 by Curtis Van Carter Leave a Comment

Distressed homeowners no longer have to pay California state income tax on debt forgiven in a short sale, foreclosure, or loan modification.  Enacted into law yesterday, Senate Bill 401 generally aligns California’s tax treatment of mortgage debt relief income with federal law.  For debt forgiven on a loan secured by a “qualified principal residence,” borrowers will now be exempt from both federal and state income tax consequences.  The existing federal exemption is for indebtedness up to $2 million, whereas the new California exemption is for indebtedness up to $800,000 and forgiven debt up to $500,000.

“Qualified principal residence” indebtedness is defined as debt incurred in acquiring, constructing, or substantially improving a principal residence.  It includes both first and second trust deeds.  It also includes a refinance loan to the extent the funds were used to payoff a previous loan that would have qualified.

The tax breaks apply to debts discharged from 2009 through 2012.  Californians who have already filed their 2009 tax returns may claim the exemption by filing a Form 540X amendment.
 
Taxpayers who do not qualify for the above exemptions (e.g., second home or rental property) may nevertheless be exempt under other provisions.  Most notably, taxpayers who are bankrupt are exempt from debt relief income tax.  Also, taxpayers who are insolvent are exempt from debt relief income tax to the extent their current liabilities exceed current assets.

Reprinted from the California Association of Realtors Realegal

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Filed Under: CA Real Estate, From Curtis, RE Current Info Tagged With: CA Real Estate, Curtis Van Carter, Foreclosure, RE Current Info

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