On Saturday, October 10, Governor Jerry Brown vetoed AB 99, a bill that sought to extend the federal Mortgage Forgiveness Debt Relief Act to California borrowers. AB 99 would have provided state income tax relief to borrowers whose mortgage debt had been forgiven by their lender in 2014.
What does this mean? Californians with mortgage debt forgiven in 2014 will now be required to treat the forgiven debt as income on their California State Tax Return. Depending on the scope of the forgiven debt, this can mean that borrowers will be required to claim thousands (even hundreds of thousands) of unearned dollars as income on their California state taxes in 2015. As you can imagine, this will have a huge financial impact on borrowers who have already experienced financial blows from foreclosure or short sale.
Governor Brown explained his decision to veto the bill with the following remarks: “Despite strong revenue performance over the past few years, the state’s budget has remained precariously balanced due to unexpected costs and the provision of new services. Given these financial uncertainties, I cannot support providing additional tax credits that will make balancing the state’s budget even more difficult.”
As tax season approaches, try to anticipate the financial impact that this may have on your tenants, family, and friends. If you or someone you know will be affected by the cancellation of debt, you may be able to take advantage of an exemption. Some possible exemptions include:Non-recourse Debt: If your loan was non-recourse debt (meaning you secured the loan with collateral), then the debt forgiveness is generally not taxable. This may apply to you if you acquired a 1-4 unit residence that you occupy.
Capital Loss on Investment Property: If the value of your investment property has dropped from its purchase price, you may be able to use the capital loss to offset the debt forgiveness. This will eliminate some of your tax liability.
Insolvency: If you owe your creditor more than the amount of assets you own, you may be able to claim insolvency and receive an exemption up to the amount of the insolvency.
Bankruptcy: If you filed for Bankruptcy before the debt forgiveness occurred, you may be discharged from personal liability, and therefore be exempt from debt forgiveness tax.
If you have any questions, please contact us to discuss this matter further. If we can’t help, we have several great accountants and attorneys for referral.