Governor Schwarzenegger says “hasta la vista” to taxes on forgiveness of mortgage debt. The Bill (SB 401) creates a California law which provides a tax break to borrowers whose mortgage debt was forgiven through a foreclosure, short sale, or loan modification. Mirroring the federal Mortgage Forgiveness Debt Relief Act of 2007, this enactment provides much needed relief to many homeowners who are either considering a short sale or a loan modification on an over leveraged property.
A homeowner who has fallen behind on their mortgage payments is obviously in no position to pay taxes on forgiveness of debt or boot. Prior to this law and the Mortgage Forgiveness Debt Relief Act of 2007, tax laws viewed debt that was forgiven as income and would tax the homeowner on the amount forgiven.
The new California law allows homeowners to exclude canceled mortgage debt income of up to $500,000 on their principal residence, or up to $250,000 for a married individuals filing separately. It applies to debt forgiveness in 2009 through 2012.
However, there are exceptions. Debt forgiveness on a second home mortgage, business property, or investment property does not qualify for the exclusion. Refinance loans that allow cash-out equity are also excluded.
The California Franchise Tax Board estimates that approximately 100,000 people will benefit from the tax break between now and the 2012 tax year.
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