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California SB 401is on its way to The Governator’s office for a signature…according to his staff.
This law protects California Home Owners against taxation on presumed “gains” from Short Sales.
What do we mean by this?
- Homeowners that sold their homes via Short Sale may or will receive a 1099c at years end.
- Why? The difference between what was owed to your lender and what it was sold for is taxable!
- Example: Mortgage Amount of $500,000. You Short Sale for $300,000. You may/will receive a 1099c at years end showing a $200,000 gain in income!
- This 1099c is looked at as gain because you “benefited” from these monies, but did not pay them back.
This and like bills are not unique.
In November 2007, President Bush signed the Mortgage Debt Relief Forgiveness Act of 2007. The IRS has adopted this bill and it is good through December 31, 2012.
What do these laws do for you?
If you are a homeowner…primary residence, you are protected from further penalties.
We will remind you that we are not CPA’s so talk to yours for the skinny!
Best,
Kris
Kylw….ditto!
For people that are covered under the bill (i.e. primary residence, didn’t cashout during a refi, etc.): File for a federal extension. California gives an automatic extension and you do not need to file for it, so you dont have to do anything. Now, pay any Federal or California tax due by April 15 that is unrelated to the Bill 401. (i.e. tax you would have to pay anyway if you under paid your withholdings, etc.) When the bill into law and your tax preparation software has been updated, file both returns and you should be at zero due/owed. You’re done.
If you are not entirely covered under the law, hire a good tax preparer and use the insolvency provisions of Form 982, assuming you qualify.
For those that have experienced a short sale or foreclosure in 2009: SB401, Section 93 clearly states that the Emergency Economic Stabilization Act of 2008 (Public Law 110-343), shall apply to discharges and indebtedness occuring on or after January 1, 2009 and before January 1, 2013. This will conform state law to the Inernal Revenue Code as amended by the Mortgage Forgivenesss Debt Relief Act of 2007 (Public Law 110-42) …
The question that remains unanswered is what exactly to do with your state tax form 540. There seems to be no guidance at this point from CPA’s or tax lawyers regarding how to go about filing state taxes to reflect this change. If anyone in this predicament has found the answer, please come forward and share the wealth.
The bill covers not only ‘short sales’ but most importantly foreclosures!
The main purpose of SB 401 is to conform to existing federal tax code in many areas. A great bill if you ask me.
I have been researching this issue for the last year +. My home was finally foreclosed on at the end of 2009. I have received a number of different incorrect 1099cs’ from WF (they are IDIOTS) but I digress.
Go ahead and file you state return. You can do it one of two ways. In my case I chose to send a letter with my return explaining the 1099cs were wrong and that I wasn’t reporting them until I could get them corrected but I also wrote them an additional letter stating that as soon as the 1099cs were correct I would file an amended return. Your other option is to file your return with the foreclosure amounts included and then after the bill is signed file an amended return. Honestly, I am not a lawyer, CPA but I have done a ton of research on this subject and there are a lot of variables that need to be considered. Read the bill carefully so you know where you stand and then file accordingly. It’s traumatic and hard work but it’s worth it. Why? Well I have talked to at least 10 attorneys, and 4 CPAs and guess what-I have never gotten the same answer twice. NO ONE (at least no one willing to say so) really knows what to do so cover your own back by being informed. Whatever you decide to do file a return by 4/15/10. You will have to make the call on what numbers you use but know that you can turn right around and amend the return. It is a shame that it took our state legislature and governor so long (6 days before 4/15) to do anything…this has been a nightmare for thousands of homeowners. It applies to a lot of different situations not just short sales so do you homework. Good luck and best wishes for a better new year!
Maggie,
I believe your response is the best answer to this difficult scenario.
Remember, all of you who are in this scenario…no one cares more about your situation more than yourself. Get educated and take control. Don’t wait for answers from people that may or may not know what to do…take action and protect yourself!
Best,
Kris
We have been following SB401 and now are searching for leads on where to find answers concerning the filing of our state 540. Currently, the phantom income from our foreclosure is included. We are wondering if we need to file an extension or modify the 540 before the 15th, provided the Gov. signs the bill.
We have spoken to three CPA’s and they are at a loss for guidance on this issue. We would appreciate any assistance you may want to offer.
I would file timely and complete a change of filing after the bill is approved.