YOU MAY OWE THE GOVERNMENT FEDERAL INCOME TAX IF YOUR HOME WENT INTO FORECLOSURE, YOU DID A SHORT SALE OR YOU HAD A LOAN MODIFICATION WHERE THE PRINCIPAL AMOUNT OF THE LOAN WAS LOWERED
FACTS
Most people believe when the real property they own is sold due to foreclosure or they sell it for less than what is owed on it, or there is a loan modification where the principal amount owed is reduced, there is not taxable income and they do not have to pay taxes on the loss. That may or may not be true. READ WHAT FOLLOWS.
The federal government passed the federal Mortgage Forgiveness Debt Relief Act of 2007.
You do have to report the debt that is forgiven to the Internal Revenue Service on Form 982. HOWEVER, it is not included in your income FOR FEDERAL TAX PURPOSES, if:
1. The house was your PRIMARY RESIDENCE. (Second homes, vacation homes and rental property do not apply and will have the loss included as income for income tax purposes.)
2. The debt that is forgiven is $2 million or less. ($1 million for a married person that files the federal income tax return separately.)
3. The debt forgiven or to be forgiven occurs in the calendar years 2007 through and including 2012,
MORAL
Now you might think this is the end all of it. However, see your CPA if you do not qualify as above and read IRS Publication 4681 (Canceled Debts, Foreclosures, Repossessions, and Abandonments.) The CPA may be able to show you were insolvent in such a way that debt forgiveness should still occur. This also may occur in a bankruptcy filing if you fill your bankruptcy and tax forms properly. (lat22810b9)
HOWEVER, this is not yet true for California for debt forgiveness that occurs in 2009.
CALIFORNIA FRANCHISE TAX BOARD AND DEBT FORGIVENESS IN FORECLOSURES, SHORT SALES AND LOAN MODIFICATIONS
FACTS
As of January 1, 2009 compliments of the Governor of the State of California and the State Legislature, California no longer offers debt forgiveness when you lose your home to foreclosure, short sale or reduction in debt due to loan modification. California State Income Tax is owed for all debts forgiven due to foreclosure, short sale or loan modifications that occurred from January 1, 2009 on. (The State Government wants to add insult to injury and pour salt on the wound.) For example, if you earned $48,000 in 2009 and your home sold or had principal reduction or went to foreclosure such that the lender lost $100,000. Your income for California tax purposes for 2009 is $148,000 and this is what you must pay taxes on as of March 5, 2010.
The Governor and the legislature in their infinite wisdom allowed the state version of the federal debt forgiveness bill to lapse and did not renew it. While the federal bill runs 2007 to 2012, the California bill only ran from 2007 to 2008 and expired on December 31, 2008. Two bills were introduced in the legislature but neither one has been enacted. Then a third bill came in but THE GOVERNOR IN HIS INFINITE WISDOM VETOED THAT BILL. (Why not stamp on people who have been kicked out of their homes so we can worsen the misery?) There are two bills that have been reintroduced to give the suffering people some relief but they have not moved. The politicians have their agenda at the expense of a suffering people that have already lost their homes and now are going to be taxed on it unless legislation is passed before April 15, 2010 when the California Franchise Tax Return is due! (ocr3510l3)
MORAL
Legislators and the Governor will push their political agenda at the expense of people who are already suffering and in some cases kicked out on the street. NOTE: Notwithstanding this you may have some relief if you were financially insolvent at the time. This would include the filing of bankruptcy under certain conditions or your accountant filing the appropriate papers to prove you were insolvent at the time. See your CPA and you should really wait until the last hour before filing the California return. The Legislators and the Governor might take pity.
THE INFORMATION CONTAINED HEREIN IS NOT LEGAL ADVICE.
AN ATTORNEY SHOULD BE CONSULTED IF YOU DESIRE LEGAL ADVICE.
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Last Updated: 03/07/10
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