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Governor signs bill conforming window period of California tax rule
with federal rule on mortgage debt forgiveness
On April 12, 2010, the Governor signed SB 401 (2010), revising the California tax rules relating to mortgage debt forgiveness. See Stats 2010, ch 14, §14. This act was necessary because some real property secured loan modification or workout agreements, and all short sales and deeds in lieu of foreclosure, effectively forgive part or all of the debt owed by the borrower, and that is a taxable event. See, e.g., California Mortgages, Deeds of Trust, and Foreclosure Litigation §§2.110-2.112, 10.24, 10.30 (4th ed Cal CEB 2009). Under the federal Mortgage Forgiveness Debt Relief Act of 2007 (Pub L 110-142, 121 Stat 1803) and recent amendments extending its expiration date, a borrower may exclude from gross income the discharge of "qualified principal residence indebtedness" (subject to special rules in IRC §108(h)) in an amount up to $2 million for married taxpayers filing jointly and $1 million for those filing separately, if the discharge occurs between January 1, 2007, and January 1, 2013. IRC §108(a)(1)(E). See Stanley, Reflections on the Mortgage Forgiveness Debt Act of 2007, 31 CEB Real Prop L Rep 45 (March 2008). The following year, a similar bill was passed in California. See SB 1055 (2008), effective September 25, 2008, which added Rev & T C §17144.5, but that bill applied only to the 2007 and 2008 tax years and was nonconforming in other respects. In April, 2010, the California legislature enacted and the governor signed SB 401, which amended §17144.5, making the tax rule retroactively applicable to tax years 2009 through 2012 by incorporating the sunset date of the amended federal law and adding substantive conforming changes, such as increasing the tax exclusion amounts of mortgage debt forgiveness.
WARNING: Not all transactions qualify for this tax relief. Both lenders and borrowers should consult qualified tax experts on the tax benefits or liabilities, bookkeeping requirements, and tax impacts of any foreclosure as well as any workout or other settlement between borrowers and lenders affecting loan payments or the amount of the debt. The chaptered bill website for Governor signed SB 401 is: http://www.leginfo.ca.gov/pub/09-10/bill/sen/sb_0401-0450/sb_401_bill_20100412_chaptered.html.
For guidance from CEB on real property foreclosures, bankruptcies, and loan workouts, see California Mortgages, Deeds of Trust, and Foreclosure Litigation (4th ed Cal CEB 2009); California Real Estate Bankruptcies: Law and Litigation (Cal CEB 2010); and California Real Estate Finance Practice: Strategies and Forms (Cal CEB 2000).
© The Regents of the University of California, 2010. Unauthorized use and/or duplication of this material without express and written permission from this blog's author and/or owner is strictly prohibited.
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