Good News! For federal tax purposes, mortgage forgiveness debt relief on principal residences has been extended until December 31, 2013, under the federal American Taxpayer Relief Act of 2012, approved on January 2, 2013.
As of the date of this publication, California has not conformed.
Accordingly, taxpayers who had all or part of the loan balance on their principal residence forgiven by their lender after December 31, 2012, may continue to exclude the forgiven debt from their federal gross income only.
Presently, for California tax purposes, the debt forgiven after December 31, 2012, may still be excluded if:
1. Taxpayers were bankrupt when the discharge occurred (Title 11 discharge).
2. Taxpayers were insolvent (limited to level of insolvency). - Most of you qualify here...
3. Qualified farm indebtedness was canceled.
4. Debt was Qualified Real Property Business Indebtedness (QRPBI) and you make a federal election. The taxpayer cannot be a C corporation to use this exclusion.
If more than one of these exceptions applies, they are applied in the above order under Internal Revenue Code Section 108(a)(2).
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