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State of California Franchise Tax Board

Mortgage Debt Forgiveness May Be Taxable in California

Released: January 14, 2008

SACRAMENTO - California does not automatically conform to the “Mortgage Forgiveness Debt Relief Act of 2007” signed by the President on December 20, 2007. In order for the provisions of this act to apply to California, the legislature must enact conforming legislation.

The “Mortgage Forgiveness Debt Relief Act of 2007,” was enacted to provide relief to families hit by the subprime mortgage market. Under California tax law, however, debt forgiven following mortgage foreclosure or renegotiation is considered income for tax purposes and may result in a tax liability for taxpayers.

There is pending California legislation, Senate Bill 1055, which will provide modified conformity to provisions of this federal legislation. Introduced by Senators Michael Machado and Lou Correa, the bill would provide that mortgage debt forgiveness is not included in California taxable income.

We will provide further information in the event this legislation is enacted. Taxpayers can check FTB’s Website at www.ftb.ca.gov under “law and legislation” for updates. Taxpayers who have questions about their accounts can call FTB toll free at (800) 852-5711 Monday through Friday from 7 a.m. to 6 p.m.

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