FTB Checks Taxpayer Qualifications for Exemption of COD Income on Potential “Nonqualified Properties”
In January 2011, we began mailing letters to pre-selected individuals who received a Form 1099-C, Cancellation of Debt (COD), for tax years 2007 and 2008.
On April 12, 2010, SB 401, the Conformity Act of 2010 was enacted. The law largely brings California into conformity with the federal Mortgage Forgiveness Debt Relief Act of 2007 for discharges that occur in tax years 2007 through 2012. It allows taxpayers to exclude from their income the amount of qualified mortgage debt on their home loan that has been forgiven by their lender resulting from a foreclosure, “short sale,” or loan modification. However, for California purposes, the amount of qualified mortgage debt is less than the federal amount, and a state-only limitation is imposed on the total amount of relief that may be excluded from gross income. Debt forgiveness on other types of properties, such as a second home, rental, investment, or business property (“nonqualified properties”), does not qualify for exclusion under the new law.
In an effort to measure compliance with the law, our review letters focus on COD income related to the “nonqualified properties.” We advise such taxpayers that they may still be able to exclude COD income under other provisions and encourage all who receive the review letter to promptly respond. Failure to respond could result in formal audit action, penalties, and/or a tax assessment.
We provide the following information resources to assist taxpayers who received a 1099-C and/or who have questions regarding COD issues:
- ftb.ca.gov – Search for mortgage debt relief.
- IRS.gov – Search for home foreclosure and debt cancellation.
- IRS publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments
- Federal law – Mortgage Forgiveness Debt Relief Act and Debt Cancellation
- SB 1055 – Legislative Change 08-7
- Press Release April 2010 – California Enacts Mortgage Forgiveness Debt Relief
- Tax News February 2010 – California Code of Civil Procedures and Foreclosure
- Tax News November 2009 – Documents, Second Mortgages, Tax Reporting – How to Handle a Foreclosed Home for Tax Purposes
- Tax News July 2009 – Foreclosure and Short Sales