Mortgage Debt Forgiveness Will Not be Taxed in California

Governor Schwarzenegger has signed into law a “mortgage debt tax relief provision” which will shelter Californians who have lost their homes in this down market.

Part of bill SB 401, the provision will allow individuals to exclude up to $500,000 on the forgiven debt, or $250,000 for married individuals filing separately.  This covers only principal residences from 2009 to 2012.

Homeowners would have had to pay taxes on the amount remaining on the loan as the result of a short sale or foreclosure. Debt-reducing loan modifications are also covered by this new law.

Second homes, income or business property, and cash-out equity refinance loans are excluded.

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