CA Residents Can Now Exclude Forgiven Mortgage Debt from Income – Los Angeles Income Tax Planning & Income Tax Litigation Attorney Bruce Givner

by Bruce Givner on July 31, 2014

A new bill signed by California Governor Jerry Brown (D) will allow homeowners who had mortgage debt forgiven in 2013 to exclude that debt from their taxable income. The bill, A.B. 1393, was written by Assemblyman Henry T. Perea (D), who stated “Requiring homeowners to pay income taxes on forgiven debt puts additional stress on people already struggling to recover from the collapse of the housing market.” He added, “They can't afford to pay an additional tax on money they never received.”

The bill effectively extends by one year California’s partial conformity to federal mortgage forgiveness debt relief, after lawmakers allowed the conformity provision to expire at the end of 2012. The conformity provisions had been in place since 2008, and the federal government extended them through 2013.

Specifically, the law, which becomes effective immediately, allows mortgage holders filing jointly to exclude up to $500,000 of discharged debt from gross income, and $250,000 for registered domestic partners or married individuals filing separately. In terms of qualified principal residence indebtedness, the maximum amount is $800,000 for joint filers and $400,000 for separate return filers. The law applies to discharges of mortgage debt after Jan. 1, 2013, and before Jan. 1, 2014, and also prohibits penalties or interest on discharges of debt during the 2013 taxable year. This prohibition stands regardless of whether or not the taxpayer reports the discharge on his/her 2013 tax returns.

The bill, which was sponsored by the California Bankers Association, received support from all quarters. State Board of Equalization member George Runner (R) backed the bill, as did the California Association of Realtors, the California Credit Union League, California Independent Bankers, California Society of Enrolled Agents and the California Taxpayers Association.

What kind of hit on state revenue will this bill produce? The exclusion will result in $35 million of lost revenue in fiscal year 2013-14, and an additional $4 million in fiscal year 2014-15.

                Givner & Kaye focuses on sophisticated income tax planning and compliance, tax litigation and procedure, estate planning, and asset protection plans for individuals and businesses in Beverly Hills, Calabasas, West Los Angeles, Hollywood, and other areas of Los Angeles, Orange, Ventura, San Bernardino, Riverside and Santa Barbara Counties. Call Los Angeles Estate Planning and Asset Protection Plan Attorneys Givner & Kaye at (310) 207-8008 today.

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