A new California state law enacted at the eleventh hour allows residents to immediately exclude forgiven mortgage debt from their taxable income.
The measure, “SB 401,” permits most taxpayers to exclude canceled mortgage debt up to $500,000 on their primary residence resulting from a foreclosure, short sale, or loan modification.
The limit is $250,000 for married/registered domestic partner individuals filing separately.
It applies to debt forgiveness in 2009 through 2012, and mainly brings California into conformity with federal debt relief laws.
“California has been particularly hard hit by the housing crisis,” said State Controller and FTB Chair John Chiang, in a release.
“This is a critical tax change that will help people in our state who already are suffering the loss of their homes.”
Previously, such forgiven mortgage debt would have been considered taxable income in the state of California and reported on tax form 1099-C.
Had it not been amended, many struggling, former homeowners would be without a home and burdened with a huge tax bill to boot.
If you’ve already filed your tax return, but believe you qualify based on the new law, you can file a Form 540X (amended individual income tax return), and subtract the amount of debt relief from income.
“To expedite processing, write “Mortgage Debt Relief” in red across the top of the amended tax return. Taxpayers must attach a copy of their federal return, including Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), with their state tax return.”
It is estimated that approximately 100,000 residents may benefit from the mortgage debt relief for tax years 2009 to 2012. More info at taxes.ca.gov