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 Do you need to amend your 2007 tax return? Possibly yes, California’s mortgage forgiveness debt relief law applies to 2007

The California mortgage forgiveness debt relief law (Senate Bill 1055), was enacted after many taxpayers had already filed their 2007 tax return, but covers qualified debt forgiven in 2007 and 2008. 

The California mortgage forgiveness debt relief law is similar to federal law, but with important differences.

The California law covers qualified debt forgiven in 2007 and 2008, and it:

  • Limits the amount of qualified principal residence indebtedness to $800,000 for taxpayers who file as married/registered domestic partners (RDP) filing jointly, single, head of household, or widow/widower, and to $400,000 for taxpayers who file as married/RDP filing separately.
  • Limits debt relief to $250,000 for taxpayers who file as married/RDP filing jointly, single, head of household, or widow/widower, and to $125,000 for taxpayers who file as married/RDP filing separately.

The federal law covers qualified debt forgiven from 2007 through 2012,[1] and it:

  • Limits the amount of qualified principal residence indebtedness to $2 million for taxpayers who file as married filing jointly, single, head of household, or widow/widower, and to $1 million for taxpayers who file as married filing separately.
  • Does not limit the debt relief amount: it only limits the indebtedness amount used to calculate the debt relief amount.

If you filed your 2007 tax return before October 2008, or you were unaware of this new law, you may have overpaid your 2007 taxes. If you overpaid your taxes, there is a time statute of limitations[2] to request a refund from us. Generally, you can file a refund claim until the later of four years from the due date of the return or one year from the date of overpayment.

If you want to file a claim for refund in order to claim debt relief, you can file a Form 540X, Amended Individual Income Tax Return.

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

For more information, go to our website and search for mortgage forgiveness.