Subprime Mortgage Crisis
One of the more unpleasant surprises to emerge from the subprime mortgage crisis was the realization by many unfortunate homeowners that foreclosures, short sales and other repercussions of defaulting on the mortgages on their “underwater” homes also triggered serious income tax consequences. In those cases, homeowners whose property had dropped in value below the amount of their mortgage and who lost their property through foreclosures, short sales, or other events also ended up being taxed on their “mortgage debt forgiveness”—namely, the amount of their mortgage debt that was “canceled” because the bank could not collect that amount due to the difference between the amount of their mortgage and the depressed value of their homes.
As a result, many homeowners who had already lost their property now had a new problem. The income tax bill that they received after the banks reported the tax losses they took on the amount of mortgage debt they could not collect on those “underwater” mortgages. In order to attempt to lessen the blow, the California legislature amended the Revenue and Taxation Code. This allowed homeowners to exclude a portion of their “mortgage debt forgiveness” from their income for those homes lost in tax years between January 1, 2007 and December 31, 2012.
Amended Revenue and Taxation Code
Recently, in recognition of the fact that the subprime mortgage problem was still working its way through the system in 2013, the California legislature further amended the Revenue and Taxation Code to extend this partial income tax exclusion of mortgage debt forgiveness through the 2013 tax year. Taxpayers who have already filed their 2013 tax returns may amend those returns to take advantage of this new legislation. Please contact your tax advisor to determine whether you are entitled to take advantage of this program.