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Taxes Due on Loan Modification and Forgiven Debt

Find out how a new state bill could impact you.

The California Association of Realtors recently mailed out a letter out explaining some of the latest bills introduced on their behalf to protect the real estate industry in California. 

One of the bills, SB30, concerns state taxes due under the latest laws, for forgiven mortgage debt. Below is a portion of the letter, which explains how SB30 could affect you:

While debt relief has been extended at the federal level, the California exemption expired at the end of 2012, so forgiven mortgage debt is considered taxable state income for now.

We’re aware of your concerns this could have on short sales, and that’s why C.A.R. is sponsoring SB 30 (Calderon, D-Montebello). SB 30 will conform state law to the federal law passed last week. Upon passage of SB 30, the measure will be effective retroactive to Jan. 1, 2013.

Here are other housing-related provisions included in the federal law:

  • The “Pease Limitations” that reduced the value of itemized deductions, including the mortgage interest deduction, are permanently repealed for most taxpayers but will be reinstituted for high income filers. This provision reduces a taxpayer's itemized deductions by 3 percent of the amount of his or her adjusted gross income (AGI) that exceeds the threshold amount.  Under the new law, the Pease thresholds are $300,000 for married taxpayers filing jointly and $250,000 for single taxpayers (i.e., a married couple with an AGI of $400,000 would be $100,000 over the threshold; the couple’s deductions would be reduced by $3,000 which is 3% of $100,000). No matter how high a taxpayer's AGI, the Pease reduction cannot exceed 20 percent of the amount of itemized deductions otherwise allowable for the year.  

  • The restoration of a tax deduction for mortgage-insurance premiums, including premiums paid to the Federal Housing Administration and private mortgage insurers. This provision expired at the end of 2011 but has now been retroactively extended for all of 2012 as well as 2013.

  • 10 percent tax credit (up to $500) for homeowners for energy improvements to existing homes is extended through 2013 and made retroactive to cover 2012.

  • Capital gains rates will remain at 15 percent for those earning less than $400,000 (individual) and $450,000 (joint). Gains above those income levels will be taxed at 20 percent. Gains on the sale of principal residences will remain unchanged and continues to exclude the first $250,000 for single taxpayers and $500,000 taxpayers filing jointly.

For more information, you can read a complete version of SB 30 online.

This post is contributed by a community member. The views expressed in this blog are those of the author and do not necessarily reflect those of Patch Media Corporation. Everyone is welcome to submit a post to Patch. If you'd like to post a blog, go here to get started.

Deborrah Henry January 26, 2013 at 10:52 PM
I don't agree...bankers are in the profession of screening people...the right people for the loan... people tend to trust their bankers to tell them if they can afford the house or not..based on their expertise... and at the time...the market was going up up up and everyone wanted a piece of the pie...put it into perspective...remember the buying frenzy? NO ONE ever thought it was possible that the market would tank...I have no idea why...because to me and others familiar with these markets, it could be logical...but since we've never experienced this kind of an economy...remember? the thinking? the denial?the times?
JustUs January 26, 2013 at 10:56 PM
Thank you for your response, Ms. Henry. And I think we may have found some common ground here. I think churches and charitable organizations should help the unfortunate like they have throughout our history instead of relying on government to fix all the problems. Today churches are directing the unfortunate to government social services instead of doing the heavy lifting by being part of the solution. We have 47 million people on food stamps. 1 out of every 6 Americans! That's atrocious! Perhaps it's time for the churches and charitable organizations to feed them instead! It is simply bankrupting our society! And with the HUGE debtload facing the younger generations it is virtually unsustainable mathematically. Unless we get a handle on the problem TODAY it will get much worse TOMORROW! But if people get themselves in financial difficulty by taking out loans that they cannot afford, wastefully spending the money that they have, living in an irresponsible manner, etc...the they are victims of their own actions and they should figure out a way to get themselves out of it! If someone is always there to save them, they never learn, Ms. Henry. They become perpetual scofflaws since there is an incentive to be one. People follow the inventives! Always!
Deborrah Henry January 26, 2013 at 10:59 PM
Here here!
JustUs January 26, 2013 at 11:05 PM
Oh, btw, Ms. Henry. Just so you know.....I place more responsibility on the Wall Street crooks and bankers - and our government officials who enabled them....than I do on the peasants who they gave loans to that couldn't possibly get paid back. Peasants are always going to take whatever you give them. The ones who gave them (no or low incomes, bad credit risks, etc...) the loans should have know better. But they WILLFULLY ignored the risks that would inevitably crash the economy. It was almost as if the whole thing was planned (perhaps it was. who knows?). So I hold the BIG BOYS most responsible for sure. But it took a village. And the peasants were part of that village. And that is why I must include them as part of the problem. That's as honest as I can get.
leanngillian February 10, 2013 at 07:39 AM
A Loan Modification is a permanent change in one or more of the terms of a Borrower's loan, allows the loan to be reinstated, and results in a payment the Borrower can afford.

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