SB401 to forgive CA Cancelled Debt Income THROUGH 2012

Underwater homeowners no longer have to pay California state income tax on debt forgiven in a short sale, foreclosure, or loan modification. Signed into CA law today, Senate Bill 401 generally mimics Federal tax treatment of Cancellation of Debt Income. For debt forgiven on a loan secured by a "qualified principal residence," borrowers will now be exempt from both federal and state income tax consequences. The existing federal exemption is for indebtedness up to $2 million, whereas the new California exemption is for indebtedness up to $800,000 and forgiven debt up to $500,000.
"Qualified principal residence" indebtedness is outlined as debt incurred in acquiring, constructing, or substantially improving a principal residence. It includes both first and second trust deeds if both were used in the same manner. It also includes a refinance loan to the extent the funds were used to payoff a previous loan that would have qualified.
The tax breaks apply to debts discharged from 2009 through 2012!! Californians who have already filed their 2009 tax returns may still 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 however be exempt under other provisions. Taxpayers who are bankrupt or who are insolvent may also be exempt from debt relief income tax (please consult your tax attorney or CPA for consultation specific to your circumstance).