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Mortgage Forgiveness Debt Relief

Tax Years 2014 through 2016

The federal Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from forgiven debt on their principal residence and provisions of this Act were extended to the 2014 tax year. There was a recent effort to conform California law to federal law during the 2015-2016 legislative session; however, the legislation did not pass.

IF THEN

You owe a debt to someone else.

AND

They cancel or forgive that debt.

The forgiven amount may be taxable.

Debt is reduced through mortgage restructuring.

OR

The mortgage debt was forgiven in connection with a foreclosure.

You may qualify for Federal relief.

Your debt was discharged before January 1, 2014, but on or after January 1, 2007. Similar relief for state taxes is available.

Is 2014 (and later) mortgage debt forgiveness taxable for CA purposes?

To answer that question, you must first determine:

IF THEN
The cancellation of debt originates from nonrecourse or recourse debt forgiveness. Generally speaking, nonrecourse debt forgiveness does not result in a tax liability from Cancellation of Debt Income (CODI). However, a portion of recourse debt forgiven in 2014 may result in CODI, and therefore may be taxable.
The debt is recourse; do any exceptions or exclusions apply? There are two common conditions that allow a taxpayer to exclude CODI from their taxable income.
  1. The discharge occurred in a Title 11 bankruptcy.
  2. The taxpayer was insolvent when the discharge occurred.

For more information about these and other exclusions, please see IRS Publication 4681. That publication also contains a worksheet to help calculate the extent to which a taxpayer is insolvent immediately before the debt cancellation.

Franchise Tax Board's Conformity to the IRS

As of October 16, 2015:

California law remains out of conformity with the federal statutory exclusion for certain discharges of qualified principal residence indebtedness for discharges of indebtedness occurring on or after January 1, 2014.

Therefore,

  IF THEN
Federal A discharge of qualified principal resident indebtedness occurred on or after January 1, 2014, and before January 1, 2015. The mortgage debt forgiveness was extended an additional year to provide relief to qualified taxpayers.
California Any discharge of qualified principal resident indebtedness income from a discharge of qualified principal resident indebtedness that occurred on or after January 1, 2014, and before January 1, 2015, which is excluded for federal purposes. The debt may be required to be included in the taxpayer's California income.

California Assembly Bill 1393, signed into law as Chapter 152, extended California’s modified conformity to mortgage debt forgiveness for one year, through 2013. Specifically,

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

On April 12, 2010, SB 401, the Conformity Act of 2010 was enacted.

California law conforms, with modifications, to federal mortgage forgiveness debt relief for discharges that occurred in tax years 2007 through December 31, 2012.

California Federal
Limits the amount of qualified principal residence indebtedness to $800,000 for taxpayers who file as married/registered domestic partners (RDP) filing jointly, single, head of household, or widow/widower, and to $400,000 for taxpayers who file as married/RDP filing separately. Limits the amount of qualified principal residence indebtedness to $2,000,000 for taxpayers who file as married filing jointly, single, head of household, or widow/widower, and to $1,000,000 for taxpayers who file as married filing separately.
Limits debt relief to $500,000 for taxpayers who file as married/RDP filing jointly, single, head of household, or widow/widower, and to $250,000 for taxpayers who file as married/RDP filing separately. Does not limit the debt relief amount; it only limits the indebtedness amount used to calculate the debt relief amount.
See the federal law Mortgage Forgiveness Debt Relief Act and Debt Cancellation for more information.

In the wake of the 2007 American housing market collapse and subsequent mortgage crisis, the U.S. Congress enacted the Mortgage Forgiveness Debt Relief Act of 2007 (P.L. 110 142) and Emergency Economic Stabilization Act of 2008 (P.L. 110-343).

These Acts include provisions under federal law that, subject to certain conditions, that allows taxpayers to exclude from their federal taxable income the discharge of debt on their principal residence (Cancellation Of Debt [COD] income) that they would otherwise have been required to report (2007 through 2012).1 The special federal rules relating to qualified principal residence apply to debt reduced through mortgage restructuring, as well as to mortgage debt forgiven in connection with a foreclosure.

For Conformity information see Tax Years 2009 through 2012.

  IF THEN
Federal You have COD income as the result of a foreclosure on other property, such as:
  • A second (vacation) home
  • Rental
  • Business property
You may still be able to exclude COD income under other provisions if:
  • You were bankrupt when the discharge occurred (Title 11 discharge).
  • You were insolvent (limited to level of insolvency).
  • Qualified farm indebtedness was canceled.
  • Debt was Qualified Real Property Business Indebtedness (QRPBI)2 and you make a federal election.
California

The amount of debt relief for federal purposes is the same as or less than the California limit.

OR

The amount of debt relief for federal purposes is more than the California limit.

No adjustment is necessary on Schedule CA (540/540NR).

 

Include the amount in excess of the California limit on Schedule CA (540/540NR) line 21f, column C.

Additionally, you must include a copy of your federal return, including Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), with your original California tax return. There is no similar California form.

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