Mortgage Debt Relief Bill in California: Not Quite as Forgiving

Like the housing market, debt relief is a little more expensive in California.

On the state level, Senate Bill (SB) 1055, authored by Sen. Michael J. Machado, passed the Senate Revenue and Taxation Committee on an 8-0 vote. The measure would help California taxpayers whose lenders have forgiven a portion of their mortgage debt, by allowing them to exclude the forgiven debt from their incomes for state income tax purposes. Under existing state tax law, forgiven debt on mortgages is taxable to the borrower as ordinary income for the year in which the debt is forgiven. Per the Franchise Tax Board:

"If it passes, SB 1055 will conform to specified provisions of the federal Mortgage Forgiveness Debt Relief Act of 2007 – with a notable difference. For California taxpayers, the period of excludable discharges would be from January 1, 2007, to December 31, 2008. The federal period of excludable discharges is from January 1, 2007, to December 31, 2009."

For the federal Mortgage Relief Debt Forgiveness Act of 2007, look to Form 982 . Bankrate.com's summary for us is:

"Under the Mortgage Debt Forgiveness Act of 2007, some homeowners granted forgiveness of mortgage debt won't have to pay taxes on that amount. But there are some restrictions:

1. There is a limit on the forgiven debt: up to $2 million or $1 million for a married person filing a separate return.
2. The tax break also has a time limit. It only applies to mortgage debt discharged by a lender in 2007, 2008 or 2009.
3. The loan also must have been taken out to buy or build a primary residence, not a second or vacation home. If debt is forgiven on those additional properties, the owner will owe cancellation of debt income as usual."

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