There are 30 days to go until January 1, 2014 when forgiven debt from the disposition of a principal residence – exempted from income tax since the Mortgage Debt Relief Act of 2007 went into effect, will again become taxable. This is not the first time this law has had to be revised for an extended date, and each time it was extended the extension occurred at the last minute – or even weeks after it expired.
For federal tax purposes, mortgage forgiveness debt relief on principal residences was extended until December 31, 2013, under the federal American Taxpayer Relief Act of 2012, approved on January 2, 2013.
As of the date of this blog post, California has not conformed.
The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
This provision applies to debt forgiven in calendar years 2007 through December 31, 2013. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately).
Presently, for California tax purposes, the debt forgiven after December 31, 2012, may still be excluded if:
- Taxpayers were bankrupt when the discharge occurred (Title 11 discharge).
- Taxpayers were insolvent (limited to level of insolvency).
- Qualified farm indebtedness was canceled.
- Debt was Qualified Real Property Business Indebtedness (QRPBI) and you make a federal election. The taxpayer cannot be a C corporation to use this exclusion.
If more than one of these exceptions applies, they are applied in the above order under Internal Revenue Code Section 108(a)(2).
CONGRESS AT WORK –
There is an extension bill afoot – and it has been “in House committee” since July 23, 2013. You can see it through this hyperlink: https://www.govtrack.us/congress/bills/113/hr2788/text
The bill is all of one page long and consists of a thimble full of words – enough to change the expiration date from January 1, 2014 to January 1, 2016. It has been sitting in committee for five (5) months. Perhaps the totality of the foreclosure / recession fallout will be over in 30 days?
CALIFORNIA’S BILL SB-30:
Cancellation of Indebtedness: Mortgage Debt Forgiveness in California. This bill would have extended the operation of the exclusion of the discharge of qualified principal residence indebtedness to debt that is discharged on or after January 1, 2013, and before January 1, 2014. As of this writing, SB 30 is being held up in committee. Lawmakers are in favor of extending the California cancellation of indebtedness: mortgage debt forgiveness. The bad news is that SB 30 is being held hostage with an unpopular bill SB 391, which makes SB 30 operative only if Senate Bill 391 of the 2013–14 Regular Session is enacted and takes effect! That is unlikely and SB 30 will probably have to be taken up again in the next legislative session in 2014-2015.
YOUR CALL TO ACTION!!!
There are alternatives to not having to pay for the income generated by the forgiven debt. In summary they include the “insolvency test” of the taxpayer just before the debt forgiveness – this is a total asset solvency vs. total liabilities test; and the elimination of the debt being forgiven before the lender has a chance of forgiving it. This is done through bankruptcy, but timing for the bankruptcy is most important for this to work.
The name and address of your Congressman and Senator can be found at the respective hyperlink in this sentence. Write to them now to encourage them to get this bill out of committee and onto the President’s desk.