Mortgage Forgiveness: Good News Regarding Tax Liability on Forgiven Debt

California state income tax on forgiven debt resulting from a short sale, foreclosure, or loan modification will no longer be imposed on homeowners in California. Senate Bill 401 makes California’s tax treatment of mortgage forgiveness debt relief income the same as federal law. Be advised, however, that only the debt stemming from the loan secured by a “qualified principal residence,” will be exempt from both federal and state income tax consequences.

While the federal exemption amount is up to $2 million, the California exemption is up to $800,000 and forgiven debt up to $500,000. Now, I know you’re thinking… what is a “Qualified principal residence.” This means that only the debt incurred in connection with acquiring, constructing, or substantially improving a principal residence is the subject of this legislation.

Principal residences are where you actually reside, receive mail and inhabit for all intents and purposes. This new debt forgiveness exemption will include first and second trust deeds, as well as debt incurred in connection with a refinance loan to the extent that that fund from said loan were used to payoff a previous loan that would have also qualified under Senate Bill 401′s guidelines.

In order to make the application process uncomplicated a number of things must be done. Together with your application you must include: pay slips, insurance policies, utility bills and even tax returns slips. All of these must be attached to the Housing Affidavit that must accompany any application. You must also seek the services of a modification representative to assist you with the application.

Generally the loan approval period can be lengthily depending on the complexity of your situation. But is your loan was insured or your loan is government backed you automatically qualify for modification.

Learn more about Obama Mortgage Relief Plan Qualifications.