Tax Exemption for Mortgage Debt Forgiveness
The good news! Homeowners will be getting some relief on their taxes this year and the years to come. The Mortgage Debt Forgiveness Law allows a homeowner to not have to claim the debt forgiven from a short sale or foreclosure as income.
The bad news! The State of California lost the exemption January 1, 2009. The Federal exemption continues to December 31, 2012.
California law, SB 1055, which went into effect Sept. 25, 2008, conforms California Revenue and Tax Code Section 17144.5 to the federal Mortgage Forgiveness Debt Relief Act of 2007 with the following exceptions:
(1) The maximum amount of acquisition indebtedness is $800,000 for couples filing jointly and $400,000 for individual filers;
(2) The maximum amount of debt relief income that can be forgiven is $250,000 for couples filing jointly and $125,000 for individual filers; and
(3) California’s debt relief statute applies to property sold on or after Jan. 1, 2007, and before Jan. 1, 2009.