FOR many homeowners who are going on foreclosure or short sale, many seem to take for granted, the reason behind lenders not pursuing a deficiency judgment on remaining unpaid balances.
This law,which Congress passed on a federal level, will expire by the end of 2012. You want to panic now, not when it might be too late -- 6 months prior to this law expiring -- because if you intend to short sale your property, the process sometimes takes longer, depending on your lender and qualification.
Currently, some types of debts that are forgiven can be considered as income and can be taxed by the government, meaning that homeowners spared from overwhelming mortgage can face huge tax bills.
The Mortgage Forgiveness Debt Relief Act of 2007
The recent legislative action conforms California law to that federal tax change, which runs through 2012.
Until now, the amount forgiven by the lender has been considered taxable income under California law. This measure eliminates that tax when a bank agrees to accept less than what is owed on a home.
On April 12, 2010, SB 401, the Conformity Act of 2010 was enacted. It allows taxpayers who had all or part of the loan balance on their principal residence forgiven by their lender to exclude the forgiven debt from California gross income. The new law applies to discharges of qualified principal residence indebtedness on or after January 1, 2009, and before January 1, 2013.
The bill provides relief for homeowners who received mortgage modifications, lost their homes to foreclosure or did short sales on their homes. It would prevent the canceled debt from being treated as taxable income.
Keep in mind this pertains to taxes, as far as a deficiency judgment is concerned, a lender could still go after a homeowner for a judgment on the remaining balance, it would then be a fight or a settlement that needed to be negotiated between homeowners and lender.
Federal provision applies to discharges occurring in 2007 through 2012, and:
-Limits the amount of qualified principal residence indebtedness to $2,000,000 for taxpayers who file as married filing jointly, single, head of household, or widow/widower, and to $1,000,000 for taxpayers who file as married filing separately.
-Does not limit the debt relief amount; it only limits the indebtedness amount used to calculate the debt relief amount.
California provision applies to discharges that occurred in 2007 through 2012, and:
Taxable years 2009 through 2012
-Limits the amount of qualified principal residence indebtedness to $800,000 for taxpayers who file as married/registered domestic partners (RDP) filing jointly, single, head of household, or widow/widower, and to $400,000 for taxpayers who file as married/RDP filing separately.
-Limits debt relief to $500,000 for taxpayers who file as married/RDP filing jointly, single, head of household, or widow/widower, and to $250,000 for taxpayers who file as married/RDP filing separately.
How to file
Talk to your CPA based on my info file, 540 CA including Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), with your original California tax return. There is no similar California form.
Cancellation of debt
In the wake of the 2007 American housing market collapse and subsequent mortgage crisis, the US Congress enacted the Mortgage Forgiveness Debt Relief Act of 2007 (P.L. 110 142) and Emergency Economic Stabilization Act of 2008 (P.L. 110-343).
These Acts include provisions under federal law that, subject to certain conditions, that allows taxpayers to exclude from their federal taxable income the discharge of debt on their principal residence (COD income) that they would otherwise have been required to report (2007 through 2012).2 The special federal rules relating to qualified principal residence apply to debt reduced through mortgage restructuring, as well as to mortgage debt forgiven in connection with a foreclosure.
Property other than principal residence
The federal Mortgage Forgiveness Debt Relief Act only provides for the exclusion of COD income relating to qualified principal residence. If you have COD income as the result of a foreclosure on other property, such as a second (vacation) home, rental, or other business property, you may still be able to exclude COD income under other provisions if:
You were bankrupt when the discharge occurred (Title 11 discharge).
You were insolvent (limited to level of insolvency).
Debt was Qualified Real Property Business Indebtedness (QRPBI) 3 and you make a federal election.
If more than one of these exceptions applies, they are applied in the above order.4
For more information, see IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. The IRS Publication 4681 has a worksheet that can be used to help calculate the extent to which a taxpayer is insolvent immediately before the cancellation. Check with your CPA to get more detailed information.
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Please call Ken Go of 1st Innovative Finance Group at (562)697-7028 or email This e-mail address is being protected from spambots. You need JavaScript enabled to view it Thanks for your support and This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
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