NO MORE STATE TAX ON FORGIVEN DEBT
Distressed homeowners no longer have to pay California state income tax on debt forgiven in a short sale, foreclosure, or loan modification.Â Enacted into law yesterday, Senate Bill 401 generally aligns California’s tax treatment of mortgage debt relief income with federal law.Â 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.Â The existingÂ 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.Â It includes both first and second trust deeds.Â It also includes a refinance loan to the extent the funds were used to payoff a previous loan that would have qualified.
I think you are going to be responsible for any equity lines that were taken out and spent on other things. I think both are fair, 1 – if you took out an equity line on your San Diego Home and spent the money it is income in my opinion. On the other hand if you property is worth less than what you paid for it and you didn’t use it as a piggy bank I don’t believe it is fair to also be taxed on what you never received.
I think a lot of people who don’t qualify are going to be in for a surprised when they get a tax bill. If you are reading this and are considering foreclosure or a short sale and an agent or attorney is advising you make sure you get your own advice and talk to you accountant. There are so many variables and the repercussions so huge don’t leave it to chance.
The tax breaks apply to debts discharged from 2009 through 2012.Â 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.Â Most notably, taxpayers who are bankrupt are exempt from debt relief income tax.Â 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.Â The full text of Senate Bill 401 is available at www.leginfo.ca.gov.
C.A.R. provides REALTORSÂ® with many legal articles covering a wide range of topics of interest.Â Some of the new or newly revised legal articles available at http://qa.car.org/ are as follows:
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