April 30, 2013

One of the near-casualties of the Fiscal Cliff earlier this year was the Mortgage Debt Forgiveness Relief Act, which expired on December 31st, 2012. However, on January 3rd, 2013, President Obama signed The American Taxpayer Relief Act, which extended the deadline of the Mortgage Debt Forgiveness Relief Act one more year to December 31st, 2013.

The Mortgage Debt Forgiveness Relief Act was originally enacted in 2007 to accommodate the rising number of homeowners who had to do short sales as a result of the housing crisis.

A short sale occurs when a lender allows the homeowner to sell their home at a price that is lower than what is owed on the mortgage. The difference between the amount owed and the sales price is “forgiven” by the lender.

As with most forms of debt relief, the amount forgiven by the lender has been historically treated as taxable income by the IRS (adding insult to injury for the home seller).

When the housing crisis began to unfold, Congress and the Legislature decided not to consider canceled housing debt as income. This applied to canceled debt from foreclosure, the refinancing of a home loan or the short sale of a primary residence up to $2 million.

The California state law providing more relief, the Mortgage Debt Forgiveness Relief Act of 2007, expired at the end of 2012. This excluded up to $500K from taxable income in the form of debt forgiveness.

In California, AB 42, a bill that seeks to extend state tax relief for mortgage debt forgiveness was presented by Assemblyman Henry Perea, D-Fresno earlier this month. AB 42 would mirror the federal law and extend state income tax relief for debt forgiveness up until the end of 2013.

The Franchise Tax Board estimated the local impact to be a $50 million reduction in state income tax for 2013.

Since California’s mortgage debt forgiveness bill could affect state revenues, the measure was set aside until further analysis could take place regarding next year’s budget projections.

Brenda Harjala is a staff writer for Optima Tax Relief. Her mission is to help consumers stay financially savvy, and save some money with tax relief.