According to the Franchise Tax Board, the Conformity Act of 2010 allows taxpayers who had all or part of the loan balance on their principal residence forgiven by their lender to exclude the forgiven debt from California gross income. The new law applies to discharges of qualified principal residence indebtedness on or after January 1, 2009, and before January 1, 2013.

When does the new apply?
The new law applies for taxable years 2009 through 2012. California law conforms, with modifications, to federal mortgage forgiveness debt relief for discharges that occurred in tax years 2007 through December 31, 2012. The amount of qualifying indebtedness is less than the federal amount and California imposes a state-only limitation on the total amount of relief excluded from gross income.

What are the differences between the Federal and California provisions?

Federal Provision:
The Federal provision applies to discharges occurring in 2007 through 2012, and limits the amount of qualified principal residence indebtedness to $2,000,000 for taxpayers who file as married filing jointly, single, head of household, or widow/widower, and to $1,000,000 for taxpayers who file as married filing separately. The Federal law does not limit the debt relief amount however, it only limits the indebtedness amount used to calculate the debt relief amount.

California Provision:
California provision applies to discharges that occurred in 2007 through 2012, and taxable years 2009 through 2012 and limits the amount of qualified principal residence indebtedness to $800,000 for taxpayers who file as married/registered domestic partners (RDP) filing jointly, single, head of household, or widow/widower, and to $400,000 for taxpayers who file as married/RDP filing separately.

The law Limits debt relief to $500,000 for taxpayers who file as married/RDP filing jointly, single, head of household, or widow/widower, and to $250,000 for taxpayers who file as married/RDP filing separately.

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