What is SB 401 and How Will Its Passing Change What CA Sellers Pay?
It is fitting that a discussion of debt relief should take place on April 15th–the date for filing ones Federal and State income taxes. Good grief, we all can use tax relief!
Well, on Monday, Governor Schwarzenegger signed SB 401 (Wolk) into law providing distressed homeowners with state tax exemption on debt forgiven in a short sale, foreclosure, or loan modification. So what does this new bill mean in plain English, and how can you, Mr./Ms. Seller take advantage of this new debt relief?
California State Tax Law is now Aligned with the Federal Tax Law
Bear in mind, that California homeowners generally were exempt from owing federal taxes on the forgiven mortgage debt, but still were required to pay California taxes on the so-called “phantom income.” For debt forgiven on a loan secured by a “qualified principal residence,” borrowers now will be exempt from both federal and state income tax consequences.
What is a Qualified Principal Residence?
“Qualified principal residence indebtedness is defined as debt incurred in acquiring, constructing, or substantially improving a principal residence, including both first and second mortgages. It also includes refinance loans to the extent the funds were used to payoff a previous loan that would have qualified under these guidelines”
What Do I Do If I’ve Already Filed My 2009 Tax Returns?
If you’ve already filed your 2009 tax returns –and if you haven’t, you have a few short hours in which to do so without penalty–(unless, you have filed for an extension), you may amend your returns and claim the exemption by filing a Form 540X amendment. This tax relief applies to debts discharged from 2009 through 2012.
How Do I Know if I Qualify for California Tax Relief SB 401?
Taxpayers who do not qualify for the above exemptions (e.g., second home or rental property) still may be exempt from paying taxes on forgiven mortgage debt under other provisions. Most notably, bankrupt taxpayers are exempt from debt relief income tax. Also, taxpayers who are insolvent are exempt from debt relief income tax to the extent their current liabilities exceed current assets.
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