California Enacts Legislation to Partially Conform to Mortgage Forgiveness Debt Relief Act


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Legislation has been enacted that partially conforms California personal income tax law to federal amendments made by the Mortgage Forgiveness Debt Relief Act of 2007 (MFDA). That’s the legislation which allows you to exclude the amount of your mortgage debt from your income when facing foreclosure.

Whenever the Feds provide us with a new tax break it’s always interesting to see which states play ball and which ones don’t. For example, when the Feds introduced the idea of 50% bonus depreciation a few years ago, many states took the opportunity to uncouple from matching the federal system automatically. They looked at the revenue loss as being more than they were prepared to give up. So, you’d wind up getting a deduction on your federal taxes then have to add the deducted amount back in for your state tax calculation. California is definitely one of those states.

Earlier this year we wrote about one of the really hard parts of foreclosure: the treatment of forgiven debt amounts as income and taxation on that supposed “income.” As if losing your home to foreclosure wasn’t hard enough, you now have a tax bill on the amount of your former mortgage. The MFDA provided a 2-year window for people losing their homes to exclude the former mortgage amounts from income – i.e., you are no longer taxed on that amount.

But the legislation was federal, meaning you could still pay state tax on the debt amount if your state isn’t one of the ones that automatically adopts federal legislation.

In California, lawmakers have voted to partially allow the mortgage exclusion for state taxes. But what they’ve done instead is say that you can only exclude a mortgage debt that is forgiven in the 2007 and 2008 calendar years, and the amount you can exclude is limited to $250,000 ($125,000 in the case of a married individual filing separately). California has also defined a qualifying mortgage debt as one that is no more than $800,000 ($400,000 in the case of a married individual filing separately) rather than the $2 million ($1 million in the case of a married individual filing separately) provided under federal law.

The CA government also determined that no penalties or interest will be due with respect to the discharge of any qualified mortgage debt during the 2007 taxable year, regardless of whether you reported the discharge on your 2007 return.



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