Homeowners no longer have to pay California state income tax on debt forgiven in a short sale, foreclosure, or loan modification. Enacted into law on April 12, 2010, Senate Bill 401 now aligns California’s tax treatment of mortgage debt relief income with federal law. According to a press release from the California Association of Realtors®, “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.”
These tax changes apply to debt discharged from 2009 through 2012. Additionally there is a Form 540X that Californians can now file if they had already completed their 2009 tax return before the law was enacted.
According to the California Association of Realtors®, the above exemptions apply to principal residences, but there may be other exemptions available for those with a second home or rental property.
Here are three great links for additional information:
California Franchise Tax Board: Mortgage Forgiveness Debt Relief Extended
Internal Revenue Service: Mortgage Forgiveness Debt Relief Act and Debt Cancellation
Senate Bill 401: www.leginfo.ca.gov.
With April 15th (tax day) just two days away, please remember to always consult with a Certified Public Accountant with regard to the tax consequences of a short sale, foreclosure, or loan modification.
Short Sale Expeditor
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