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California Waives State Taxes on Forgiven Mortgage Debt

A newly enacted California law provides a tax break to borrowers whose mortgage debt was forgiven through a foreclosure, short sale, or loan modification. The bill (SB 401) landed on Gov. Schwarzenegger's desk and he inked his approval just days before the April 15th tax deadline.

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According to a ""statement from the governor's office"":http://gov.ca.gov/press-release/14871/, the law provides much-needed tax relief to homeowners who have already lost their homes and cannot afford to pay thousands of dollars in taxes simply because the mortgage company forgave the remainder of the loan.

In addition, Californians who have sold their homes as short sales are allowed to exclude from taxable income the amount that was still owed to the mortgage company. The legislation also applies to homeowners who have received debt-reducing loan modifications.

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""The mortgage-debt tax relief provision in this bill will provide financial shelter for tens of thousands of Californians who have lost their hopes and dreams in the housing market crash, and it's about time we gave these folks a helping hand,"" said state Sen. Ron Calderon (D-Montebello).

The new law allows most taxpayers to exclude canceled mortgage debt income of up to $500,000 on their principal residence, or up to $250,000 for married individuals filing separately. It applies to debt forgiveness in 2009 through 2012.

The law brings California state tax policy largely in line with the federal Mortgage Forgiveness Debt Relief Act of 2007, which is in effect through the tax year 2012.

There are some exceptions though. Debt forgiveness on a second home mortgage, business property, or investment property does not qualify for exclusion under the new state law. Refinance loans that allow cash-out equity are also excluded.

The ""state's Franchise Tax Board"":http://www.ftb.ca.gov/aboutFTB/press/2010/Release_22.shtml says the new mortgage debt provision will cost California about $34 million in tax revenue over the next three years. The board also estimates that approximately 100,000 people will benefit from the tax break between now and the 2012 tax year.

About Author: Carrie Bay

Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.
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