Tax Relief for Distressed Property Owners

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Good News! Life just got a little brighter for over 100,000 distressed homeowners. CAR officially reported there will be no more California state income tax on debt forgiven in a short sale, foreclosure or loan modification. Borrowers will now be exempt from both Federal and State income tax consequences!

For a distressed borrower to qualify the forgiven debt must be on one’s “qualified principal residence”. The California exemption is for indebtedness up to $800,000. and forgiven debt up to $500,000. The Federal exemption is applicable up $2 million.

A“qualified principal residence” indebtedness is defined as debt incurred in acquiring, constructing or substantially improving a principal residence. It includes both first and second trust deeds. It also includes refinance loans to the extent the funds were used to pay off a previous loan that would have qualified.

The tax exemptions apply to mortgage debts that were forgiven or discharged from 2009 through 2012. Californians who have already filed their 2009 tax returns may claim the exemption by filing Form 540X amendment.

Taxpayers with second homes or investment properties may qualify under certain circumstances. Taxpayers who are bankrupt are exempt from income tax on debt relief. Taxpayers who are insolvent are exempt from debt relief income tax to the extent their current liabilities exceed current assets.

The full text of Senate Bill 401 is available at www.leginfo.ca.gov. or www.seehometown.com.

Life will definitely be brighter for those taxpayers that have lost their homes in foreclosure or have sold them in short sales.

The only thing better would be a blanket moratorium against lenders attempting to pursue deficiency judgments. A deficiency judgment is a judgment lien against a borrower whose foreclosure or short sale did not produce sufficient funds to pay the entire mortgage.

Lenders now have the right to pursue deficiency judgments against borrowers if the loan against the property is a re- course loan as opposed to a non-recourse loan. Non-recourse loans are the original loans made to purchase the property. They are known as “purchase money” loans. In a non-recourse loan the property is the security for the loan and lenders can’t go after borrowers for any deficiencies.

I strongly recommend that you consult a tax or legal professional to see if you qualify for the new tax exemption under Bill 401! It could be a matter of good home dollars and sense!