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 http://www.ftb.ca.gov/aboutFTB/newsroom/Mortgage_Debt_Relief_Law.shtml or http://www.irs.gov/individuals/article/0,,id=179414,00.html.
*This is our paraphrasing of a recent email from our California Association of Realtors.