SB 1055 California State Tax Relief Applied To Forgiven Mortgage Debt

The big news on everybody’s radar lately was the $700 billion “Rescue Plan,” which was vetoed by the House of Representatives yesterday and sent back to be re-drafted. Many on “Main Street” oppose to the bail out of Wall Street with tax payer’s money, while others see the “bail out” as a necessary evil that could possibly help stabilized the US economy. Meanwhile, there was another type of “rescue” that unfolded in Sacramento last Thursday.

Disclaimer: If you require specific tax advice, you should contact a professional CPA. This information is intended to provide general information and it is not substitute for individual tax advice.

Prior to the Mortgage Forgiveness Debt Relief Act of 2007 (HR 3648), many homeowners who sold their properties as short sales or lost their homes in foreclosure could’ve been on the hook with the IRS. After HR 3648 passed into law on December 2007, the tax liability was eased on struggling homeowners but not without some necessary restrictions of course.

Californians, however, were not completely exempt from any tax liabilities incurred in a short sale or foreclosure because we are also subject to California state tax laws. In order to put California tax laws regarding mortgage debt forgiveness in line with the changes made by HR 3648 to federal tax laws, Gov. Arnold Schwarzenegger signed bill SB 1055 into law this past Thursday.

Though the Senate Bill 1055 now conforms to the federal Mortgage Forgiveness Debt Relief Act of 2007 (HR 3648), it has a difference that may need to be revised in the near future. SB 1055 will only cover discharges from January 1, 2007 to December 31, 2008 in contrast to HR 3648 which covers discharges from January 1, 2007 to December 31, 2009.

Homeowners who qualified and have already filed and included discharge of principal residence indebtedness as income for California purposes may need to file an amended or corrected state income tax form. Consult with a qualified CPA for specific details of your situation; this is not to be regarded as tax advice.

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