Pleasanton Realtors have been sharing some exciting news with their clients. This past April, California enacted SB 401, which extended the Mortgage Forgiveness Relief time period from January 1st, 2009 to January 1st, 2013. This law permits the taxpayer, who had even a portion of their principal loan on their residence forgiven, to exclude the forgiven debt amount from their gross income.
While the extensions were modeled after federal changes, there are a couple major differences between California law and federal law. First, federal extensions state that the qualified principal indebtedness must be under $2,000,000 for those filing joint, single, head of household, or widow/widower. Also, married taxpayers filing separately are limited to $1,000,000. Second, the debt relief amount is not limited; only the indebtedness amount is limited.
Instead, California’s extension limits maximum indebtedness to $800,000 when taxpayers file joint, single, head of household or widow/widower; for this group the maximum debt relief can be no more than $500,000. Also, the limit is $400,000 for married couples filing separately, and they may not have more than $250,000 in debt relief. For tax returns filed for the years 2007 and 2008 the limit to qualified principal residence indebtedness is the same; however, the debt relief is limited to $250,000 for joint, single, head of household or widow/widower. For married couples filing separately the limit is $125,000.
To file for mortgage forgiveness debt relief you should consult your tax preparer. You may also go back and amend previous year’s tax returns. But it’s important to go over any changes with a preparer.
Additionally, a cancelation of your debt, i.e. foreclosure, appears as a sale and bolsters your income, but in reality it is a loss. The Mortgage Debt Relief act of 2007 and Emergency Economic Stabilization act of 2008 provide, under strict conditions, taxpayers with a means to discharge the debt of their residence, which they would have been required to pay. These same conditions apply to those homeowners that completed a mortgage restructure.
While the above changes only apply to a homeowners primary residence, some relief is available to those who had losses on second, vacation, rental or other business properties. Those owners may still be able to seek relief if they had declared bankruptcy, title 11, at the time the debt was forgiven. Other possible reasons to seek relief in would include insolvency (onese inability to pay debts as they become due), cancelation of qualified farm indebtedness, and federal election for Qualified Real Property Business Indebtedness (QRPBI).
For more information please contact Pleasanton Realtor Sonali Sethna at 925-525-2569 or sonali@sonalisells.com
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