California passed a new law to extend tax relief to those who have received mortgage loan modifications or debt forgiveness in the wake of the current housing crisis. Normally, when any loan amount if forgiven, it is treated as income for that year on your tax return. In order to prevent causing an undo burden on those who are already suffering due to current real estate market conditions, the federal government and the state of California have passed these new tax statutes.
The Conformity Act of 2010
Palo Alto home owners who have had all or part of their mortgage forgiven may now be able to exclude that debt from their California gross income for tax purposes. The Conformity Act of 2010 was passed on April 12, 2010. This new law conforms with federal mortgage debt relief (with modifications) for modifications that occurred during tax years 2007 through 2012. The amount of qualifying indebtedness is less than the federal amount and California imposes a state-only limitation on the total amount of relief excluded from gross income.
The Federal Law
- Applies to mortgage discharges that occur between 2007 and 2012
- Limits the amount of qualified principal residence indebtedness to $2,000,000 for taxpayers filing married filing jointly, head of household, or single. and $1,000,000 for married filing separately.
- No limit on the debt relief amount.
- See Federal Law for more info: The Mortgage Forgiveness Debt Relief Act and Debt Cancellation
California Law Provisions
- Limits the amount of qualified principal residence indebtedness to $800,000 for taxpayers who file married/registered domestic partners filing jointly, single, or head of household, and $400,000 for taxpayers filing married/registered domestic partners filing separately.
- Limits debt relief to $500,000 for married/RDP filing jointly, single, and head of household, and $250,000 for married/RDP filing separately.
For Tax Years 2007-2008
- Limited the amount of qualified indebtedness to $800,000 for married/RDP filing jointly, single, and head of household, and $400,000 for married/RDP filing separately.
- Limited the amount of debt relief to $250,000 and $125,000, respectively.
Claiming Mortgage Debt Relief on Your CA Taxes
You can claim your debt relief on your original CA tax return (Form 540). If the debt relief is less than or equal to the CA limits, no adjustment is necessary. If your debt relief amount exceeds the CA allowed amount, you must make include the excess amount on Schedule CA, Line 21f, Column C. 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.
If you have already filed your tax return, you can file an amended return using Form 540X to claim the mortgage debt relief. Same rules as above apply. When filing Form 540X, write “Mortgage Debt Relief” in red across the top of your amended tax return.
You can get more information about this new law from the California Franchise Tax Board website or by contacting your tax advisor.