California Restores Mortgage Debt Relief for 2013

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California taxpayers who lost their home to foreclosure or a short sale in 2013 got a last minute tax break when the legislature extended favorable tax treatment for forgiven mortgage debt.

The state law covers only sales or foreclosures occurring prior to January 1, 2014.  It mirrors but is less expansive than the federal law on  qualified mortgage indebtedness.

If the new break applies to you and you’ve filed your return, you can amend the return to claim its benefits.

The FTB supplies more details on AB 1393.

Bad news if you lost your home in 2014:  at present, neither state nor federal tax law for 2014 will exclude from income debt that was cancelled when you sold or lost your home to foreclosure.

Not to worry if loan was purchase money

But remember, Californians:  if the debt in question was the mortgage you used to buy your home  (and not a refinance), and you moved in when you purchased it, under California law, you have no personal liability for the debt.

If a purchase money loan is cancelled or forgiven in part, you don’t have cancellation of debt income, because you had no liability in the first place.  IRS letter acknowledging that purchase money loans don’t trigger cancellation of debt income.

Image courtesy of Flickr and Miran Rijavec.

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