California Approves Tax Forgiveness of 1099-C Mortgage Debt

Written on April 13, 2010 by Merre Ward

With the State and Federal tax filing deadline just 3 days away, Californians who short sold their home or were forgiven mortgage debt through a loan modification in 2009 and were issued a 1099-C (cancellation of debt) are relieved to hear Gov. Schwarzenegger signed SB401 (see Sec. 93 for more information) and will now be exempt from paying state tax on the difference between the home sales price and the mortgage balance.  One of the conditions of the tax forgiveness is the property must be a “Qualified Primary Residence” and the maximum indebtness is capped at $800,000 and the maximum foregiven debt caps at $500,000.00.

SB401 will not only help California taxpayers who do not qualify under insolvency rules or who have filed bankruptcy, but the bill will give the green light to those homeowners who otherwise would have tax consequenses after short selling their home with the newly implemented Federal Home Affordable Foreclosure Alternatives Program (HAFA).  Without the state tax relief, those persons who decide to short sell their homes from 2010 through 2012 would have possibly been stuck with a huge state tax bill.  The new state law conforms to the ”The Mortgage Forgiveness Debt Relief Act and Debt Cancellation” IRS ruling.

When a bank agrees to take less money than what is owed on a home (short sale) the difference between the mortgage balance and the sales price of the home is considered taxable income and reported to the state and IRS with a 1099-C.  This new law would make this reported income non taxable for homeowners who have short sold their primary residence.

The state tax exemption would also apply to those homeowners who lost their principal residence to foreclosure.  In this case, the bank would issue a 1099-A  (Abandonment of Property)

For more information or help with a short sale, contact Merre Ward, Broker of the www.whatshafa.com Team!

Posted in Ca Tax Law, Federal Tax Rules, Foreclosure, HAFA

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