Wednesday, March 17, 2010

Gov. Schwarzenegger Has Asked CA Legislature for Bill re Taxpayer Relief from Mortgage Debt Forgiveness as Income

Many homeowners in today's market are selling their property for less than amount owed on mortgage through short sale, or they are losing their homes through foreclosure.
People must get educated and know that a foreclosure or short sale can result in income tax consequences. 
According to the Internal Revenue Service, if you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable as income.
The US Federal government previously provided some relief in the The Mortgage Forgiveness Debt Relief Act of 2007. 
  • The Act applies only to forgiven or canceled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes.
  • The debt must be secured by the home.
  • May exclude up to $2 million of debt forgiven or canceled by a mortgage lender on a primary residence.
  • Mortgage restructuring and foreclosures qualify.
  • Available for the years 2007 through 2012.
  • Taxpayer may claim this income tax relief using IRS Form 982 (download here).
  • The lender is usually required to report amount of the canceled debt to taxpayer and IRS on Form 1099-C, Cancellation of Debt.
However, State of California law is not yet consistent with the Federal government on this and does not conform to the federal Mortgage Forgiveness Debt Relief Act re discharges occurring in 2007 through 2012. 
So the amounts excluded for federal income tax purposes must be added to income for California tax purposes, and debt relief in foreclosure and short sales is still taxable in California.
As of today, March 17, 2010, there is a bill pending in California to mirror what the Federal government has accomplished on mortgage debt forgiveness.  Governor Schwarzenegger has called for such legislation and said he will sign it into law as long as the bill is not tied to other tax increases.
Warning:  Be careful with this.  If you an owner involved in foreclosure of a home or short sale, you must contact your local qualified income tax professional, C.P.A., or lawyer, to determine your eligibility for possible US income tax on mortgage forgiveness.

Posted via email from Explore OC Homes


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