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Mortgage Debt Cancellation A message from the President of C.A.R. Calif Assoc of Realtors.
California’s tax treatment of mortgage debt relief income generally aligns with federal law, and both the California and federal laws are set to expire at the end of 2012. For debt forgiven on a loan secured by a “qualified principal residence,” borrowers are exempt from both federal and state income tax consequences, but only until Dec. 31, 2012. The existing federal exemption is for indebtedness up to $2 million, whereas the new California exemption is for indebtedness up to $800,000 and forgiven debt up to $500,000.
However, these tax breaks apply only to debts discharged from 2009 through 2012. It may be that Congress will take action to extend the federal exemption before year’s end, but we will have to wait and see. If the federal law is extended, it is likely that California would follow in due course, as in the past, but it is not guaranteed. The last time the federal tax exemption was extended, California did not conform its tax law until well into the next year.
Sellers who have transactions closing after Dec. 31, 2012, should speak to their own legal counsel or tax advisors about the impact of the expiration of these laws and their potential tax liabilities, including the applicability of other exemptions from debt relief income tax.