On July 21, 2014, Governor Brown signed AB 1391, extending California’s exclusion for cancellation of debt income for a principal residence through December 31, 2013.
Previously, the exclusion expired December 31, 2012.
This change conforms California’s exclusion effective date to the federal exclusion, which also expired on December 31, 2013. This item is one of the extenders that the U.S. Congress will consider, probably after elections are over in November, 2014.
Remember the limit for qualified indebtedness is much lower under California’s exclusion than the federal limit. It’s $800,000 for taxpayers who file joint returns, single persons, heads of households, and qualifying widows or widowers, and $400,000 for married persons or registered domestic partners who file separate returns.
The federal limit is $2,000,000 for most taxpayers and $1,000,0000 for married persons who file separate income tax returns.
California taxpayers who reported income from cancellation of indebtedness on their 2013 individual income tax returns should determine whether they can reduce their California tax by filing an amended income tax return.
Most of the trusts and estates that I work with have enough cash to pay debts of the decedent.
I’m currently the trustee of a trust with little cash until the family home is sold.
I discovered the decedent had about $20,000 of credit card debt accruing about 25% interest.
My sister, Arlene McLean is a banker at Wells Fargo Bank. She told me to call the credit card companies and notify them of the death of the credit card holder.
When I called, each of the companies read from the same script. “You are not personally responsible for this debt. This account is now closed and frozen and will no longer accrue interest or penalties. As the personal representative, you will hear from our probate department.”
Since I was afraid I was going to have to make a big loan to the trust to cover these debts, it was a great relief to me.
You’re never too old to learn something new. Thought you might find this information useful.
The exclusion for cancellation of debt income for a principal residence mortgage is scheduled to expire after 2012.
You can read more details about the exclusion in this article http://www.realestateinvestingtax.com/shortsale.shtml
If you want to take advantage of this exclusion, your short sale or foreclosure should be done by December 31, 2012 (the end of this year).
Since you don’t have control over the process of a foreclosure, you will probably pursue the short sale alternative.
I highly recommend that you get legal and tax advice before going ahead.
Remember there are alternative exclusions for cancellation of indebtedness income, including bankruptcy, insolvency, and qualified real property business indebtedness.
Also, the exclusion generally doesn’t apply to a short sale or foreclosure involving a nonrecourse mortgage, because the property is deemed to be sold for the amount of the mortgage.
Here is a link for the IRS publication about debt cancellation http://www.irs.gov/pub/irs-pdf/p4681.pdf
Contact your representatives in Congress about extending this tax break. There are many taxpayers who still haven’t resolved their mortgage issues relating to the collapse of the real estate market and the economic slowdown.
Among many other federal tax provisions expiring after December 31, 2012, is the exclusion for cancellation of debt for a principal residence.
For details, see my article, “Tax Consequences of a Short Sale or Real Estate v. Foreclosure” http://www.realestateinvestingtax.com/shortsale.shtml
Since only about a third of the year remains, now may be the time to take action to secure the benefit of the exclusion. You have more control over a short sale (assuming you can find a buyer). With a foreclosure, you are at the mercy of the lender for when it happens.
Write your representatives in Congress to ask them to extend this exclusion. Too many people are still suffering from the real estate crash, even though there is news of prices starting to recover.
This week’s interview on Financial Insider Weekly to be broadcast in San Jose and Campbell this Friday, December 30 is with William Mitchell, CPA. Our interview subject is, “I owe back taxes to the IRS! Now what should I do?”. The interview will be broadcast at 8:00 p.m. Pacific Time on Comcast Channel 15 in San Jose and Campbell, and will be broadcast as streaming video at the same time at www.creatvsj.org.
Investors who have multiple rental properties and experience a debt cancellation relating to a rental property might be missing an important tax break.
Tax return preparers and individuals who use tax return preparation software or (God forbid!) prepare their income tax returns by hand usually report taxable cancellation of debt for a rental property as “other income” at line 21 of Form 1040.
According to Revenue Ruling 92-92 and page 3 of IRS Publication 4681, cancellation of debt attributable to passive activity expenditures, such as purchase of the rental property, is passive activity income. For a rental property, the debt cancellation income should be included on line 3 of Schedule E as “rental income” for the property.
If some of the cancellation of debt income is attributable to funds used for a personal purpose, such as cash received from refinancing a property used to pay for a personal car or vacation, that portion does not qualify as passive activity income and still must be reported as “other income” on line 21 of Form 1040.
Reporting the cancellation of debt income as passive activity income will enable the taxpayer to not only use any unused passive activity losses for the foreclosed or short sold property as an offsetting deduction, but also unused passive activity losses from other properties or passive investments.
Be sure to watch for this when reporting cancellation of debt income for a rental property in 2009, and check whether an amended income tax return should be filed to correct errors on tax returns already filed.
California has enacted relief legislation for cancellation of mortgage debt relating to the acquisition of a principal residence.
Governor Schwartzenegger signed SB 401(Wolk), the Conformity Act of 2010, on April 12, 2010, while we tax return preparers were busy finishing income tax returns and extension forms.
Effective for taxable years 2009 through 2012, the maximum qualified principal residence indebtedness eligible for relief is $400,000 for taxpayers who file as married or registered domestic partners filing a separate return and $800,000 for taxpayers who file joint returns, single persons, head of household and qualifying widow or widower (other individual taxpayers).
The debt relief that can be excluded from taxable income is limited to $250,000 for married or registered domestic partners filing a separate return and $500,000 for other individual taxpayers.
Note that the amount that can be excluded from taxable income was increased compared to the amounts that could be excluded for 2007 or 2008, which was $125,000 for married or registered domestic partners filing a separate return and $250,000 for other individual taxpayers.
Those taxpayers who now qualify for relief for 2009 and who filed their 2009 Califonria individual income tax returns should file amended returns, Form 540X, including an amended Schedule CA (540/540NR). When filing Form 540X, write “Mortgage Debt Relief” in red across the top of page one of Form 540X.
There is no California equivalent to Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. Use the Federal form marked “California” at the top.
Governor Schwartzenegger vetoed SBX8 32 last Thursday, March 25, 2010. The bill included many provisions conforming California tax laws to Federal tax laws, including a limited conformity to an exclusion from taxable income for cancellation of debt for a principal residence. Previous conformity expired on December 31, 2008.
There are more proposals for California relief relating to cancellation of debt for a principal residence pending. According to Spidell Publishing, the maximum qualified principal residence indebtedness will probably be $800,000 ($400,000 for married filing separate returns) and the maximum exclusion will probably be $500,000 ($250,000 for married filing separate returns.)
It is unlikely that California conformity will pass before April 15, 2010. Taxpayers with debt cancellation due to a short sale, foreclosure or loan modification should consider filing for an extension of time to file their 2009 California income tax returns. Remember the time for paying tax is not extended.