Contra Costa may get continued short sale tax relief

Contra Costa short sale tax relief extended?

As many know, if you conducted a short sale, or lost your home in foreclosure you will receive a 1099 from your banking institutions reporting to the IRS and state tax agencies the amount of debt they cancelled on your behalf. Cancelled debt can be considered income for tax purposes and can certainly pose quite a hardship to many already hard hit borrowers who have lost their homes. One of the most often asked questions has been about Contra Costa short sale tax relief.

In 2007, federal lawmakers passed HR 3648, The Mortgage Debt Relief Act to offer relief and a possible exemption to some borrowers facing cancellation of debt income due to the short sale or foreclosure of their homes. Further, in California, state lawmakers adopted SB 401 meant also to “forgive” the tax owed for cancellation or forgiven debt income. It is important you discuss with your CPA or tax attorney as to whether these two tax relief acts may help you if you are looking to conduct a Contra Costa short sale or if you’ve foreclosed in Contra Costa (or expect to). There are certain guidelines and very specific forms you must file with your taxes for the tax year you saw the forgiven debt, and for which you received your 1099 (in other words, DO NOT IGNORE the 1099 you get from your lender just because you think you’re exempt from the taxes).

Read the IRS site directly for more information on the 2007 Mortgage Forgiveness Debt Relief Act and Debt Cancellation Contra Costa short sale mortgage tax relief – IRS information. Right now, this debt relief act is set to expire at the end of this year (2012).

As of August 22, 2012, word is that an extension of the mortgage debt tax relief act has passed the senate committee and is awaiting final full Senate approval soon. The extension of the tax relief act would provide the tax protections for one more year, through 2013. From the LA Times earlier this month:

Here’s some encouraging news for financially stressed homeowners across the country: The Senate Finance Committee has approved a bipartisan bill that would extend the Mortgage Forgiveness Debt Relief Act through 2013.

Why is this important? Several reasons: The debt relief law spares homeowners who receive principal reductions on their mortgages from being hit with hefty federal income taxes on the amounts forgiven. Without it, millions of owners who go through foreclosure or leave their homes following short sales would experience even more financial stress.

California has had a similar law on the books, also set to expire this year we hope to hear too to be extended. Stay tuned on California’s SB401 tax relief updates. Back in 2010, I wrote about the state’s tax relief bill and quoted:

Governor Arnold Schwarzenegger today signed SB 401 by Senator Lois Wolk (D-Davis), legislation that will bring much of our state tax policy in line with federal policy while specifically providing greater tax relief to struggling California homeowners who have sold their homes as short sales or modified their mortgage loans. This bill will also assist companies that are developing new renewable energy projects in the state that are financed by economic stimulus grants received through the American Recovery and Reinvestment Act (Recovery Act).

You can read more about SB 401 at the State Franchise Tax Board: Mortgage Forgiveness Debt Relief California

As always, consult with your tax professional for any questions and for clarification as to whether you qualify for these important short sale tax protections.

If you are looking to avoid Contra Costa short sale tax in 2012, there is still time if you contact me right away.