Wednesday, April 14, 2010

California Says: No More State Taxes on Forgiven Debt!

As the market shows, many homes are being sold as either short sale or foreclosure properties, and as of yesterday California passed a law in which troubled homeowners don’t have to pay California state income taxes on debt that was forgiven in a short sale, foreclosure, or loan modification.

What is it?

The new California exemption is for indebtedness up to $800,000 and forgiven debt up to $500,000.

For debt forgiven on a loan secured by a “qualified principal residence,” (debt in acquiring, constructing, or substantially improving a residence) borrowers will be exempt from both federal and state income tax consequences.

Who does it Cover?

Debt forgiven in a short sale, foreclosure, or loan modification discharged from 2009 to 2012. For those homeowners who already filled their 2009 taxes, there is a exemption Form 540X amendment that can still be mailed in.

It includes first and second trusts deeds.

The Fine Print:

There are many exemptions under which homeowners cannot qualify for these tax breaks, including:

- Second homeowners or rental property investors
- Bankrupt homeowners
- Insolvent taxpayers (but may still be exempt under other provisions)

For more information regarding the above information and addition exemptions, visit or,,id=179414,00.html.

*This is our paraphrasing of a recent email from our California Association of Realtors.