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Mortgage Forgiveness Debt Relief Extended


Purpose of bulletin

To inform staff that California partially conforms to the Federal Mortgage Forgiveness Debt Relief Act of 2007, and Emergency Economic Stabilization Act of 2008. For tax years beginning on or after January 1, 2009, and before January 1, 2013, taxpayers may exclude from gross income up to $500,000 ($250,000 for married/RDP filing separate) of mortgage debt forgiven.

Background

The Federal Mortgage Forgiveness Debt Relief Act of 2007 and Emergency Economic Stabilization Act of 2008, allows taxpayers to exclude from income up to $2 million ($1 million for married filing separately) of forgiveness of mortgage debt if:

  • The debt was secured by the taxpayer’s principal residence and was incurred in the acquisition, construction, or substantial improvement of the principal residence.
  • The debt was forgiven between January 1, 2007 and December 31, 2012.
  • The amount forgiven was not based on services the taxpayer performed for the lender.

The basis of the taxpayer’s principal residence must be reduced (but not below zero) by the amount excluded from income.

CA new law: Tax years 2009 through 2012

California partially conforms to the Federal Mortgage Forgiveness Debt Relief Act of 2007 and Emergency Economic Stabilization Act of 2008, which applies to discharges occurring on or after January 1, 2009, and before January 1, 2013, with the following modifications:

  • Qualified principal residence indebtedness is limited to $800,000 ($400,000 for married/RDP filing separate)
  • Maximum cancellation of debt income exclusion is $500,000 ($250,000 for married/RDP filing separate)
  • No underpayment penalty or interest will be assessed for the 2009 tax year.

Taxpayers who qualified for mortgage debt relief in 2007 or 2008 will not be able to amend their return to use these revised exclusion amounts. (See CA Prior Law below.)

Individual taxpayers

To claim relief on a previously filed 2009 tax return:

If taxpayers have already filed their 2009 tax return, and reported the mortgage debt as income, can file a Form 540X, Amended Individual Income Tax Return, in order to exclude the income and reduce their tax liability.

If the amount of debt relief for federal is more than California, include the amount in excess of the California limit on Schedule CA (540/540NR) line 21f, column C. Complete Form 540X following the instructions for that form and enter on line 2e, column B the difference from the original Schedule CA (540/540NR), line 21f, column C less the amount from the revised Schedule CA (540 or 540NR), line 21f, column C.

If the amount of debt relief for federal is the same as or less than the California limit, no adjustment is necessary on Schedule CA (540/540NR). On Form 540X, enter on line 2e, column B the amount originally entered on Schedule CA line 21f, column C.

Taxpayers need to write “Mortgage Debt Relief” in red across the top of the 540X.

To claim relief on an original 2009 tax return:

Taxpayers can file for debt relief on their original 2009 Form 540, California Resident Income Tax Return, or Form 540NR, California Nonresident or Part-Year Resident Income Tax Return.

If the amount of debt relief for federal is more than the California limit, include the amount in excess of the California limit on Schedule CA (540/540NR) line 21f, column C.

If the amount of debt relief for federal is the same as, or less than, California no adjustment is necessary on Schedule CA (540/540NR).

Taxpayers must include a copy of their federal return, including Form 982, Reduction of Tax Attributes due to Discharge of Indebtedness (Section 1082 Basis Adjustment), with their original California tax return.

CA prior law: Tax years 2007 and 2008

California law conforms to the Federal Mortgage Forgiveness Debt Relief Act of 2007, for discharges that occurred in the 2007 and 2008 tax years. (R&TC §17144.5 added by SB 1055), with the following modifications:

  • Qualified principal residence indebtedness was limited to $800,000 ($400,000 for married/RDP filing separate)
  • Maximum cancellation for debt income exclusion was $250,000 ($125,000 for married/RDP filing separate)

Taxpayer inquiries

Taxpayers can search this website for mortgage forgiveness, or call us at 800.852.5711, Monday through Friday, 8 am to 5 pm.