By Janathan L. Allen, APC of Janathan L. Allen, APC posted in Tax Services on Wednesday, September 17, 2014.
On 2 September 2014, the California’s Franchise Tax Board issued a notice to California residents that a new state law permits taxpayers to immediately exclude from their income the amount of mortgage debt on their home loan forgiven by their lender.
The notice from the California Franchise Tax Board stems from a new law signed by California Governor Jerry Brown on 21 July 2014. The law retroactively extended California’s partial conformity to the federal exclusion of income from the discharge of qualified mortgage debt to tax year 2013. California had a prior law that partially conformed to the Mortgage Forgiveness Debt Relief Act of 2007 passed by Congress, which permitted the discharge of debt on taxpayers’ principal residence. This new law helps extend some of these same benefits.
The specifics of the law include 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 separately).
- Taxpayers may exclude from gross income up to $500,000 ($250,000 for taxpayers filing separately) of qualified mortgage debt forgiven.
Normally, discharged mortgage debt is considered taxable income. For example, if a taxpayer has a mortgage worth $100,000 that is discharged, then the $100,000 would be considered taxable income. This can pose a significant financial burden on a taxpayer when taxes are due. This new law, however, alleviates some of these concerns by permitting taxpayers to exclude certain discharged mortgage debt from their income and to avoid paying an onerous tax bill.
Back in a press release in January, discussing the benefits of the proposed law, Governor Brown stated that “[w]ith housing markets beginning to recover, we must continue to provide the resources necessary to protect homeownership and strengthen … communities….That includes Congress coming together to take immediate action to pass the Mortgage Forgiveness Tax Relief Act.” Governor Brown further stated that, “[t]his critical extension would provide tax relief to individuals who have gone through mortgage modifications or worked with their bank to sell their homes.”
For taxpayers who have not filed their 2013 tax returns, they may 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. For those taxpayers who have already submitted their 2013 tax returns, they can file a Form 540X, Amended Individual Income Tax Return.
Contact Allen Barron, Inc. For Tax Preparation and Compliance
To learn more about this new law and how it may impact you, contact our tax attorneys today. Compliance with tax laws and the various state and federal agencies can be cumbersome and confusing. Our California tax attorneys at Allen Barron, Inc. have extensive experience providing a range of services including tax compliance and consulting. Contact our tax attorneys or visit one of our several offices in Southern California. We offer a free initial consultation.