California extends debt cancellation tax relief for homeowners

California has enacted tax relief legislation for cancellation of mortgage debt relating to the acquisition of a principal residence. The Conformity Act of 2010, SB 401(Wolk) was enacted on April 12, 2010.

Under the Act, effective for taxable years 2009 thorugh 2012, the maximum qualified principal residence indebtedness eligible for relief is $400,000 for taxpayers who file as married or registered domestic partners filing a separate return and $800,000 for taxpayers who file joint returns, single persons, head of household and qualifying widow or widower (other individual taxpayers).

The debt relief that can be excluded from taxable income is limited to $250,000 for married or registered domestic partners filing a separate return and $500,000 for other individual taxpayers.

“This is the tax relief that many California homeowners who had short sales or foreclosures during 2009 have been hoping and waiting for,” says Michael Gray, CPA, author of the Real Estate Tax Handbook and Michael Gray, CPA’s Real Estate Tax Letter. “Those who have already filed their returns reporting the income should file amended California income tax returns immediately. Those who filed extensions based on the assumption tax relief would be enacted can go ahead with claiming the exclusion and file their 2009 income tax returns.”

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