Mortgage Forgiveness Debt Relief in California

April 13, 2012

Even though the economy is beginning to slowly regain strength, many homeowners are still finding themselves underwater on their mortgages due to the substantial drops in home values that have occurred over the last five years. For some, the answer is foreclosure, loan modification, or short sale.

Prior to 2007, forgiven mortgage debt was considered in California to be taxable income to the mortgage borrower. However, SB 401, the Conformity Act of 2010 was enacted to allow taxpayers to exclude the forgiven debt from their California gross income. This law applies to lender discharges of qualified principal residence indebtedness.
The law conforms with federal mortgage forgiveness debt relief for discharges that have occurred in the tax years of 2007 through December 31, 2012.

Taxable years 2009 -2012
• Limits the amount of qualified principal residence indebtedness to $800,000 for those filing as married/registered domestic partners filing jointly, single, head of household, or widow/widower, and to $400,000 for taxpayers who file as married/registered domestic partners filing separately.

• Limits debt relief to $500,000 for taxpayers who file as married/registered domestic partners filing jointly, single, head of household, or widow/widower, and to $250,000 for taxpayers who file as married/RDP filing separately.

Taxable years 2007 and 2008
• Limited the amount of qualified principal residence indebtedness to $800,000 for taxpayers who file as married/registered domestic partners filing jointly, single, head of household, or widow/widower, and to $400,000 for taxpayers who file as married/registered domestic partners filing separately.

• Limited debt relief to $250,000 for taxpayers who file as married/registered domestic partners filing jointly, single, head of household, or widow/widower, and to $125,000 for taxpayers who file as married/registered domestic partners filing separately.

Claiming Debt Relief on Your Tax Return
Taxpayers can file for debt relief on their original Form 540, California Resident Income Tax Return or Form 540NR, California Nonresident or Part-Year Resident Income Tax Return.
For those who have already filed, Form 540X can be used to amend an individual income tax return.
Mortgage forgiveness debt relief may also apply to second homes, rentals, or other business properties in some cases including:

• There was a bankruptcy at the time when the discharge occurred (Title 11 discharge)
• The homeowner is insolvent
• Qualified farm indebtedness was cancelled
For more information on cancelled debts, foreclosures, repossessions, and abandonments, see IRS Publication 4681. The team at Wallace & Associates is here to help, too! If you are facing foreclosure or want to explore the tax ramifications of loan modification or a short sale, call us today at .

And, just a reminder that April 17th is the deadline for filing your 2011 individual tax returns. If you need assistance with your return or filing an extension, we’re here to help!