California Mortgage Forgiveness Debt Relief Extended Through 2013

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For Immediate Release

09.02.2014

Sacramento – A new state law allows taxpayers to immediately exclude from their income the amount of mortgage debt on their home loan that their lender forgave.

On July 21, 2014, Governor Brown signed Assembly Bill 1393 (Ch.152) retroactively extending California’s partial conformity to the federal exclusion of income from the discharge of qualified mortgage debt to tax year 2013. Specifically, the bill includes the following:

  • The California exclusion is extended to apply to discharges of qualified mortgage debt occurring on or after January 1, 2013, and before January 1, 2014.
  • Qualified principal residence indebtedness is limited to $800,000 ($400,000 for taxpayers filing separate).
  • Taxpayers may exclude from gross income up to $500,000 ($250,000 for taxpayers filing separate) of qualified mortgage debt forgiven.

Generally, if a taxpayer owes a debt and the lender cancels or forgives that debt, the canceled amount is taxable. Lenders report these amounts on a 1099-C and provide documentation to both the taxpayer and the government. Debt forgiveness on other types of debt, such as a second home or business property, does not qualify for exclusion.

Taxpayers who have not yet filed their 2013 tax return can file for debt relief on their original 2013 Form 540, California Resident Income Tax Return, or 2013 Form 540NR, California Nonresident or Part-Year Resident Income Tax Return.

If taxpayers have already filed their 2013 tax return, and reported the discharged mortgage debt as income, they can file a Form 540X, Amended Individual Income Tax Return, to exclude the income and reduce their tax liability. Taxpayers need to write “Mortgage Debt Relief” in red across the top of the Form 540X.

Taxpayers must include a copy of their federal return, including Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), with their original or amended California tax return.

To learn more, go to ftb.ca.gov and search for mortgage forgiveness.

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