By Kitty J. Lin, Attorney at Law<\/p>\n
Normally, the cancellation of debt is a taxable event.\u00a0 This means that if a creditor forgives a debt, or accepts less than what is owed to them, they issue a 1099 and the Internal Revenue Service and Franchise Tax Board in California will consider the forgiven debt as income.\u00a0 Forgiven debt is considered income because you owed a certain amount, and now you don\u2019t have to pay it back, so you received a benefit from it.<\/p>\n
In the current real estate crisis, more and more consumers have their homes foreclosed on them, or they have to do a short-sale due to their financial situation.\u00a0 It would add insult to injury if they have to pay taxes on a second mortgage or a home equity line for a home they no longer own.\u00a0 Because of this, the federal and state governments have enacted laws that protect the homeowner from this situation. As a bankruptcy lawyer<\/a> in the Bay Area there is only so much filing bankruptcy can help. <\/p>\n For federal taxes, there is the Mortgage Forgiveness Debt Relief Act of 2007.\u00a0 This law excludes debts forgiven from 2007 to 2012 on a consumer\u2019s primary residence if their principal balance was $2 million or less.\u00a0 If you are married and filing separately, the exclusion is only up to $1 million.\u00a0 One limitation of this act is that it only applies to the amount used to buy, build, or substantially improve a primary residence.\u00a0 If debt was forgiven and it was used to pay off your debts, or buy another car, those amounts are not subject to the exclusion.\u00a0 If you had refinanced your home, only the amount of the old principal balance is subject to the exclusion, not the new refinanced amount.\u00a0 Debt forgiven on rental properties, second homes, and other types of property are still subject to taxes if the debt is forgiven, unless other tax relief is available.<\/p>\n California has also followed suit to provide some debt relief for residents of California.\u00a0 California enacted SB 401, Mortgage Forgiveness Debt Relief, to aid homeowners that had their houses foreclosed, went through a short-sale, or had their loan modified from 2007 to 2012.\u00a0 It excludes canceled mortgage debt up to $500,000 of the consumer\u2019s principal balance on their primary mortgage.\u00a0 Married couples or domestic partners filing taxes separately can only exclude up to $250,000.\u00a0 Similar to the federal Mortgage Forgiveness Debt Relief Act, this only applies to primary residences.\u00a0 Second homes, rental property, and business property do not receive the same tax exclusions.<\/p>\n If it is a second home, rental property, or business property that was foreclosed or sold short, it is highly advisable that seek the advice of a professional.\u00a0 To schedule a free consultation with our experienced bankruptcy lawyer<\/a>, call toll free at 1-877-9NEW-LIFE or 877-963-9543.\u00a0 You can also visit us online at www.WestCoastBK.com<\/a> for more information.<\/p>\n","protected":false},"excerpt":{"rendered":" Normally, the cancellation of debt is a taxable event. This means that if a creditor forgives a debt, or accepts less than what is owed to them, they issue a 1099 and the Internal Revenue Service and Franchise Tax Board in California will consider the forgiven debt as income. Forgiven debt is considered income because you owed a certain amount, and now you don\u2019t have to pay it back, so you received a benefit from it.<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[14],"tags":[],"_links":{"self":[{"href":"https:\/\/www.westcoastbk.com\/blog\/wp-json\/wp\/v2\/posts\/159"}],"collection":[{"href":"https:\/\/www.westcoastbk.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.westcoastbk.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.westcoastbk.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.westcoastbk.com\/blog\/wp-json\/wp\/v2\/comments?post=159"}],"version-history":[{"count":7,"href":"https:\/\/www.westcoastbk.com\/blog\/wp-json\/wp\/v2\/posts\/159\/revisions"}],"predecessor-version":[{"id":972,"href":"https:\/\/www.westcoastbk.com\/blog\/wp-json\/wp\/v2\/posts\/159\/revisions\/972"}],"wp:attachment":[{"href":"https:\/\/www.westcoastbk.com\/blog\/wp-json\/wp\/v2\/media?parent=159"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.westcoastbk.com\/blog\/wp-json\/wp\/v2\/categories?post=159"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.westcoastbk.com\/blog\/wp-json\/wp\/v2\/tags?post=159"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}