Posted on: 21st May, 2008 11:20am
The Mortgage Debt Forgiveness Tax Relief Act has been effective in California since mid 2008. It offers tax break on canceled debt or deficiency (in short sale or foreclosure).
California law applies to qualified debt forgiven in 2007 and 2008. It limits:
The debt relief is limited to:
Federal Mortgage Debt Relief Act applies to qualified debt forgiven right from 2007 to 2012. Recently Mortgage Forgiveness Debt Relief Act was extended through 2013 so as to avoid the serious consequences of fiscal cliff. It limits:
The Federal law does not limit the debt relief amount. It only limits the amount of indebtedness used to find out the debt relief amount.
For further information, you may refer to the following resources:
Debt Relief Act - how it applies to short sale/foreclosure
If you're unable to afford the current mortgage payments, and it isn't possible to refinance with FHA Secure, then you may consider going for a short sale. A short sale is quite common in a declining market where the home sale price isn't enough to cover the outstanding balance on your mortgage. In such a situation, you have a personal liability to pay off the remaining balance on your loan.
Let's say, your lender accepts a short sale, and there's a combined mortgage (purchase loan and second mortgage) on your home. Now, the lender may not ask for the deficiency (difference between unpaid loan balance and price at which lender sells off your property) on the primary mortgage. This is due to the Anti-deficiency laws applicable to mortgages on a primary residence. But, such laws are not applicable in case of second mortgages. Therefore, you can avoid paying deficiency on the first but not on the second.
Now, if it is a refinance loan, the lender will ask for the deficiency if the short sale doesn't yield much to cover the combined debt (purchase loan and refinance mortgage). In case you fail to pay the deficiency, the unpaid amount is considered as income and the IRS requires you to pay federal income tax on the unpaid debt unless you don't qualify for mortgage tax relief under the Federal Mortgage Debt Relief Act (Mortgage Forgiveness Debt Relief Act of 2007). However, the Mortgage Debt Forgiveness Tax Relief Act can help you with tax relief only under certain conditions.
The Mortgage Debt Relief Act applies even if your property is foreclosed and there's a deficiency amount left to be paid. However, if you opt for a deed-in-lieu, the lender may not ask for a deficiency in most cases, as is the general rule.
Earlier the Mortgage Debt Relief Act applied to all states except California. However, it is now applicable to California also with some difference in the rules as compared to the Federal Law.
Let's say, your lender accepts a short sale, and there's a combined mortgage (purchase loan and second mortgage) on your home. Now, the lender may not ask for the deficiency (difference between unpaid loan balance and price at which lender sells off your property) on the primary mortgage. This is due to the Anti-deficiency laws applicable to mortgages on a primary residence. But, such laws are not applicable in case of second mortgages. Therefore, you can avoid paying deficiency on the first but not on the second.
Now, if it is a refinance loan, the lender will ask for the deficiency if the short sale doesn't yield much to cover the combined debt (purchase loan and refinance mortgage). In case you fail to pay the deficiency, the unpaid amount is considered as income and the IRS requires you to pay federal income tax on the unpaid debt unless you don't qualify for mortgage tax relief under the Federal Mortgage Debt Relief Act (Mortgage Forgiveness Debt Relief Act of 2007). However, the Mortgage Debt Forgiveness Tax Relief Act can help you with tax relief only under certain conditions.
The Mortgage Debt Relief Act applies even if your property is foreclosed and there's a deficiency amount left to be paid. However, if you opt for a deed-in-lieu, the lender may not ask for a deficiency in most cases, as is the general rule.
Earlier the Mortgage Debt Relief Act applied to all states except California. However, it is now applicable to California also with some difference in the rules as compared to the Federal Law.
California Debt Relief Act and the Federal law - how they differ
California law applies to qualified debt forgiven in 2007 and 2008. It limits:
- Amount of qualified principal residence indebtedness up to $800,000 for married/registered domestic partners filing jointly or as single, head of family or as widow/widower.
- The amount of principal residence indebtedness up to $400,000 for married/registered domestic partners filing separately.
The debt relief is limited to:
- $250,000 for married/registered domestic partners filing taxes jointly, single, head of family or as widow or widower.
- $125,000 for married/registered domestic partners filing their tax returns separately.
Federal Mortgage Debt Relief Act applies to qualified debt forgiven right from 2007 to 2012. Recently Mortgage Forgiveness Debt Relief Act was extended through 2013 so as to avoid the serious consequences of fiscal cliff. It limits:
- Amount of qualified principal residence indebtedness up to $2,000,000 for married/registered domestic partners filing jointly or as single, head of family or as widow/widower.
- The amount of principal residence indebtedness up to $1,000,000 for married/registered domestic partners filing separately.
The Federal law does not limit the debt relief amount. It only limits the amount of indebtedness used to find out the debt relief amount.
For further information, you may refer to the following resources:
Has this Act taken affect in California yet?
Thanks
Thanks
My husband's employer is requiring him to relocate too far to commute. We are upside down on our house about 175,000. If we can't do a short sale, and we have to foreclose, do we have to pay the difference of our 376,000 loan to the value of our home now? What about a bankruptcy, will that eliminate that issue? We live in California. It is looking like we might have to go the foreclosure route at this point in time. What happens? The bank isn't really willing to work with us. Thanks for any info that you can provide. This is so stressful, we didn't get in over our heads when we bought, but now that we have to relocate, we find ourselves in a real big mess.
It is my understanding that if the 2nd loan is also a purchase money - nonrecourse (in california), then the 2nd lender cannot come after you for the deficiency.
Can you be forgiven on a heloc as a second loan against your property if you can not afford it. What happens if you pay the first loan and not the second against the property? If the 2nd lender can not come after me for the deficency, what happens to the 2nd?
hi helpmeplze,
the second lender can come after you for the deficiency. it is completely up to them if they will forgive the deficiency or will come after you for it. if you pay the first loan, but default on the second mortgage, the lender can foreclose on your property because they have a junior lien on the house.
the second lender can come after you for the deficiency. it is completely up to them if they will forgive the deficiency or will come after you for it. if you pay the first loan, but default on the second mortgage, the lender can foreclose on your property because they have a junior lien on the house.
I received a 1099-C cancellation of debt income thru Loan re-structuring, I Know that as of 2009 CA don't honor the debt relief act 0f 2007. Does CA have such thing as Qualified Principal Residence Indebtedness and what form should I fill out for this?
i am current with my 1st mortgage. i could not pay monthly payments to my 2nd loan since june 2008. in december 2008 my bank approved my loan for a charge off and sold it to a collection agency. however, collection agency sent it back the bank again after 6 months. my 2nd loan is again with the same bank. when i asked the bank what was the reason why my loan returned to your bank by the collection agency they simply said we don't know. my 2nd mortgage bank served with a foreclosure notice in july last year. i should also metion that i filed for chapter 7 bankruptcy in 2007 and it was discharged in february 2008. both the loans were included in the banruptcy and were not reaffirmed. can you tell me what will possibly happen in my case?
Hi bbar,
The income from the cancellation of debt is exempt from taxes under the Mortgage Forgiveness Debt Relief Act, which is applicable to the debts discharged in 2007 through 2012. The amount of the forgiven debts, which you can exclude on your federal income tax return, will have to be included in your income for California tax purposes. There is a California law that allows borrowers to exclude the income from discharge of indebtedness. But as far as I know, it applies only to debts discharged in the years 2007 and 2008.
Hi Hadian,
You included your first and the second mortgages in the bankruptcy and both of them were discharged, right? If they have been discharged through bankruptcy, youre no longer responsible for the mortgage debts. But the bankruptcy does not remove the mortgage liens from your property. So, the lenders can foreclose your house, if you stop making payments. However, the foreclosure will not affect your credit as the debts have already been discharged through bankruptcy.
The income from the cancellation of debt is exempt from taxes under the Mortgage Forgiveness Debt Relief Act, which is applicable to the debts discharged in 2007 through 2012. The amount of the forgiven debts, which you can exclude on your federal income tax return, will have to be included in your income for California tax purposes. There is a California law that allows borrowers to exclude the income from discharge of indebtedness. But as far as I know, it applies only to debts discharged in the years 2007 and 2008.
Hi Hadian,
You included your first and the second mortgages in the bankruptcy and both of them were discharged, right? If they have been discharged through bankruptcy, youre no longer responsible for the mortgage debts. But the bankruptcy does not remove the mortgage liens from your property. So, the lenders can foreclose your house, if you stop making payments. However, the foreclosure will not affect your credit as the debts have already been discharged through bankruptcy.
I have a 1st and 2nd mortgage, both for a primary residence and never re-fi'd. I received a 1099c for the 2nd in Dec 2009 (stopped paying in June 2009). I got notice that the house would sell at auction Feb 2010. I have not received anything re: the auction or the 1st mortgage. It is my understanding that the forgiven debt on the 2nd will be taxable per state but not federal. Is this correct? And what about the 1st? Will I receive any paperwork or documentation? I am trying to complete my 2009 taxes and am not sure what to do since I haven't received anything about the 1st mortgage. Please help!
To needhelp,
If you received a 1099C Form from your second mortgage lender, it means he has forgiven the remainder of the debt. This will be your taxable income. But under the Mortgage Forgiveness Debt Relief Act of 2007, you do not have to pay any tax to the IRS for this forgiven debt amount, provided you have used the property as your primary residence.
If the first lender forecloses your property they are required to send you a Form 1099A for acquisition and abandonment of secured property. If the lender forgives the deficiency, they will also send you a Form 1099C.
If you received a 1099C Form from your second mortgage lender, it means he has forgiven the remainder of the debt. This will be your taxable income. But under the Mortgage Forgiveness Debt Relief Act of 2007, you do not have to pay any tax to the IRS for this forgiven debt amount, provided you have used the property as your primary residence.
If the first lender forecloses your property they are required to send you a Form 1099A for acquisition and abandonment of secured property. If the lender forgives the deficiency, they will also send you a Form 1099C.
I live in California. I have a residential and renting houses that were foreclosed by the banks.
Question #1. The bank for the rental home sent me the 1099C. Do I have to include this forgiven debt in my 2009 federal income tax?
Question #2. The bank for my residential house sent me only the 1099A, but not the 1099C. I called them twice and the bank said they did not have the 1099C for me. Does this means that the bank did not forgive this loan that was the reason they did not send out the 1099C?
Question #3. Do I have to pay California Tax for these two foreclosed properties?
Thanks for your help.
Question #1. The bank for the rental home sent me the 1099C. Do I have to include this forgiven debt in my 2009 federal income tax?
Question #2. The bank for my residential house sent me only the 1099A, but not the 1099C. I called them twice and the bank said they did not have the 1099C for me. Does this means that the bank did not forgive this loan that was the reason they did not send out the 1099C?
Question #3. Do I have to pay California Tax for these two foreclosed properties?
Thanks for your help.
Hi Bill,
The bank sent you the 1099C Form because they have chosen to forgive the deficiency. This will be considered as your taxable income and you will have to report it on your Federal income tax return. Debts discharged on principal residence are exempt from taxes under the Mortgage Forgiveness Debt Relief Act, 2009. But since this was your rental property you will have to pay taxes on the forgiven debt amount.
If your bank for the residential house did not send you the 1099C Form, it means they have not forgiven the deficiency yet and they can come after you to collect it at any time. They may discharge this debt and sell it off to a collection agency.
The Federal Mortgage Forgiveness Debt Relief Act, 2007 does not apply in California. The state has its own debt relief act regarding taxes on the forgiven debt amount. You will have to pay taxes for the discharge of indebtedness on the foreclosed properties, unless you were bankrupt or insolvent at the time of the foreclosure.
Thanks,
Jerry
The bank sent you the 1099C Form because they have chosen to forgive the deficiency. This will be considered as your taxable income and you will have to report it on your Federal income tax return. Debts discharged on principal residence are exempt from taxes under the Mortgage Forgiveness Debt Relief Act, 2009. But since this was your rental property you will have to pay taxes on the forgiven debt amount.
If your bank for the residential house did not send you the 1099C Form, it means they have not forgiven the deficiency yet and they can come after you to collect it at any time. They may discharge this debt and sell it off to a collection agency.
The Federal Mortgage Forgiveness Debt Relief Act, 2007 does not apply in California. The state has its own debt relief act regarding taxes on the forgiven debt amount. You will have to pay taxes for the discharge of indebtedness on the foreclosed properties, unless you were bankrupt or insolvent at the time of the foreclosure.
Thanks,
Jerry
Governor Schwarzenegger on Monday signed SB 401 (Wolk) into law providing distressed homeowners with state tax exemption on debt forgiven in a short sale, foreclosure, or loan modification. Effective immediately, this bill generally aligns California's tax treatment of mortgage debt relief income with federal law. For debt forgiven on a loan secured by a qualified principal residence, borrowers now will be exempt both from federal and state income tax consequences. The tax exemptions apply, with certain restrictions, to debts discharged from 2009 through 2012. Californians who have already filed their 2009 tax returns may claim the exemption by filing a Form 540X amendment.
Taxpayers who do not qualify for the above exemptions (e.g., second home or rental property) may nevertheless be exempt under other provisions. Most notably, taxpayers who are bankrupt 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.
Taxpayers who do not qualify for the above exemptions (e.g., second home or rental property) may nevertheless be exempt under other provisions. Most notably, taxpayers who are bankrupt 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.
our house was foreclosed and the 2nd mortgage was charged off, I wanted to know what I cn do to removed it other than paying it in full? thanks!
To anonymous,
Talk to your second mortgage lender to find out if the debt has been sold off to a collection agency. In case it has been sent to a collection agency, you need to get in touch with them. You can then negotiate with them and try to settle the debt for an amount less than what you actually owe. The collection agency is likely to accept your settlement offer if you can negotiate properly.
Talk to your second mortgage lender to find out if the debt has been sold off to a collection agency. In case it has been sent to a collection agency, you need to get in touch with them. You can then negotiate with them and try to settle the debt for an amount less than what you actually owe. The collection agency is likely to accept your settlement offer if you can negotiate properly.
two questions. Can 2nd mortgage company foreclose on property after charging it off? If sued by CA are there limitations to what they can do? Contacted them and they wouldn't work anything out, just an our way or the highway offer was made and then started talking suit and possible wage garnishments and such. What options if any do I have now?