April 19, 2010
The following information is provided courtesy of the North San Diego County Association of Realtors. It is important information concerning the Mortgage Relief Act just recently passed by the legislature here in California. This information will be of interest to you if you are in the process of potentially losing your home to foreclosure or the short sale process.
On April 12, 2010, Governor Arnold Schwarzenegger signed into law SB 401 (Wolk), the Conformity Act of 2010. It allows taxpayers who had all or part of the loan balance on their principal residence forgiven by their lender to exclude the forgiven debt from California gross income. The new law applies to discharges of qualified principal residence indebtedness on our after January 1, 2009 and before January 1, 2013 and brings California statutes in conformity with current federal law.
Borrowers will now be exempt from both federal and state income tax consequences for debt forgiven on a loan secured by a “qualified principal residence.” The existing federal exemption for indebtedness is up to $2 million (1 million for a married person filing separately). The new California exemption is for indebtedness up to $800,000 and forgiven debt up to $500,000.
The debt must have been used to buy, build or substantially improve the taxpayer’s principal residence and must been secured by that 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. Qualifying California taxpayers 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 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.
For more information about mortgage forgiveness tax consequences, go to California Franchise Tax Board’s Mortgage Forgiveness Debt Relief Extended webpage and the Internal Revenue Service’s Mortgage Forgiveness Debt Relief Act and Debt Cancellation webpage.