It’s time to pull out your calendar. Do you remember a couple years ago when the federal government was on the brink of collapse and we were about to topple over the fiscal cliff. Well, we didn’t. One of the reasons why we didn’t plunge over the cliff was because politicians were finally able to reach settlements on various political issues to allow the federal government to continue to function.
One of the compromises reached in those negotiations was in regards to mortgage debt forgiveness. Time to bring out your calendar yet again. … Try to recall back in 2007, during the foreclosure crisis, congress decided that maybe homeowners should receive some type of tax relief in conjunction with the mortgage crisis. In came the Mortgage Debt Relief Act of 2007.
A little background is again needed. Prior to the Mortgage Debt Relief Act of 2007, if you short sold your home or otherwise had the mortgage debt cancelled or adjusted, the amount of debt that was cancelled was considered income for tax purposes. This is otherwise known as taxation on phantom income.
The Mortgage Debt Relief Act of 2007 exempted certain mortgage related debt cancellations from being included as taxable income. This allowed homeowners facing foreclosures and mortgage settlement negotiations to not get hit with a massive tax bill just as they thought their financial woes were behind them. This was a good thing.
However, all good things do come to an end. This tax relief program was specifically slated to end at the end of 2012. However, the potential fiscal cliff disaster extended this good thing as the politicians in Washington D.C. as part of their fiscal cliff negotiations, extended the cancellation of debt exemption an additional year, through the end of 2013 by passing the American Taxpayer Relief Act of 2012. This meant that if you had qualifying mortgage cancellation of debt through 2013, the federal government wouldn’t shake you down for more money via a tax debt.
However, for California homeowners who were hit hard by the mortgage crisis, their second tax collector, the Franchise Tax Board, until recently offered no such extension on tax relief. Finally, in late July 2014 California, through Assembly Bill 1393 (Ch. 152) retroactively extended its partial conformity to the federal exclusion of income for cancellation of qualified mortgage debt through tax year 2013.
But it’s year 2014 right? Correct. Since this extension is belated, you will need to file an amended California income tax return, assuming that you filed your taxes on time, to take advantage of this tax relief option. Based on the tardiness of this bill, it is likely that many qualified taxpayers will be unaware of this change in the law for last year’s taxes and the government will receive a phantom windfall.
This article is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.