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Tax Relief For Distressed Solano County Sellers Finally Goes Into Law

April 13th, 2010 categories: Foreclosures / Short Sales, Selling, The Economy

Not only did the rain clouds disappear yesterday, but so too did the dark black clouds that had been hanging over many penniless Tax Reliefdistress-sale sellers from last year, who were about to incur huge state income tax bills.

But just about the same time the skies parted over Solano County yesterday afternoon, a new tax relief law went into effect, which will save distressed sellers who sold their homes in 2009 thousands of dollars.

The Long Wait Is Over

Prior to the passage of  SB 401, most California sellers who received debt relief  through a short sale, foreclosure or loan modification would have been required to report the forgiven debt as ordinary income and pay taxes on it.

As I posted last week, state legislators were hoping to enact a new debt relief law before April 15. Alas, they made it with a few days to spare.

Up To $500k In Relief Tax-Free

Now, according to the Franchise Tax Board, those with a “qualified” principal residence will be exempt for up to $500,000 of forgiven debt on loan balances of up to $800,000.

According to the FTB, only the amount you used to buy, build or improve your principal residence will qualify for the exemption. So if you refinanced your home and pulled out cash to use for other purposes, you still may find yourself subject to some tax.

The federal law allows exemptions for loan balances up to $2 million, so at $800,000, California’s law is definitely more restrictive.

Tax Relief Thru 2012

The new exemption applies to distress sellers whose debts are/were discharged between 2009 and 2012. Those who’ve already filed can amend their taxes, says the FTB.

Not every seller who received debt relief through a short sale, foreclosure or loan modification will be able to take advantage of the exemption. Along with the aforementioned borrowers who used home equity for non-real estate purposes, those who sold or lost investment property or a second home could have a tax event, unless the sellers are eligible for one of the exceptions.

The FTB updated its website earlier today with an information page on the new Mortgage Debt Relief Law.

Now, since I’m not a tax expert nor licensed to give tax advice, here’s the big disclaimer: Don’t make any decisions or construe the content in this post as tax advice. It is based solely on information I have received from others. Accordingly, before making any tax decisions, be sure to consult with your personal tax adviser.

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This entry was posted on Tuesday, April 13th, 2010 at 4:34 pm and is filed under Foreclosures / Short Sales, Selling, The Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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