Taxes Due on Loan Modification and Forgiven Debt

Find out how a new state bill could impact you.

The California Association of Realtors recently mailed out a letter out explaining some of the latest bills introduced on their behalf to protect the real estate industry in California. 

One of the bills, SB30, concerns state taxes due under the latest laws, for forgiven mortgage debt. Below is a portion of the letter, which explains how SB30 could affect you:

While debt relief has been extended at the federal level, the California exemption expired at the end of 2012, so forgiven mortgage debt is considered taxable state income for now.

We’re aware of your concerns this could have on short sales, and that’s why C.A.R. is sponsoring SB 30 (Calderon, D-Montebello). SB 30 will conform state law to the federal law passed last week. Upon passage of SB 30, the measure will be effective retroactive to Jan. 1, 2013.

Here are other housing-related provisions included in the federal law:

  • The “Pease Limitations” that reduced the value of itemized deductions, including the mortgage interest deduction, are permanently repealed for most taxpayers but will be reinstituted for high income filers. This provision reduces a taxpayer's itemized deductions by 3 percent of the amount of his or her adjusted gross income (AGI) that exceeds the threshold amount.  Under the new law, the Pease thresholds are $300,000 for married taxpayers filing jointly and $250,000 for single taxpayers (i.e., a married couple with an AGI of $400,000 would be $100,000 over the threshold; the couple’s deductions would be reduced by $3,000 which is 3% of $100,000). No matter how high a taxpayer's AGI, the Pease reduction cannot exceed 20 percent of the amount of itemized deductions otherwise allowable for the year.  

  • The restoration of a tax deduction for mortgage-insurance premiums, including premiums paid to the Federal Housing Administration and private mortgage insurers. This provision expired at the end of 2011 but has now been retroactively extended for all of 2012 as well as 2013.

  • 10 percent tax credit (up to $500) for homeowners for energy improvements to existing homes is extended through 2013 and made retroactive to cover 2012.

  • Capital gains rates will remain at 15 percent for those earning less than $400,000 (individual) and $450,000 (joint). Gains above those income levels will be taxed at 20 percent. Gains on the sale of principal residences will remain unchanged and continues to exclude the first $250,000 for single taxpayers and $500,000 taxpayers filing jointly.

For more information, you can read a complete version of SB 30 online.

This post is contributed by a community member. The views expressed in this blog are those of the author and do not necessarily reflect those of Patch Media Corporation. Everyone is welcome to submit a post to Patch. If you'd like to post a blog, go here to get started.

Michelle Mowad (Editor) January 16, 2013 at 11:26 PM
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No one January 19, 2013 at 10:44 PM
JustUs most people who are foreclosed on are already in bankruptcy. They have lost jobs, homes, forgiving them the taxes on their foreclosed home is not income. Plus why should anyone pay anymore in State taxes then they already do. Time to stop the inflated pensions and salaries and other waste in Sacramento thanks to Grey Davis and Arnold. Let homeowners who have lost EVERYTHING keep at least this little bit.
LBV Collins January 20, 2013 at 12:44 AM
Hi JustUs. If you want to "jump aboard the free cheese wagon," it's simple: just let your home go into foreclosure. Lose every penny you put into the home, destroy your credit, be barred from qualifying for an FHA loan for... what? ...seven years, I think? Yep, a real panacea.
JustUs January 20, 2013 at 01:10 AM
The Usual Suspect, everybody wants a free lunch today. Nobody wants to take responsibility for their financial mistakes. Many people bought way too much home for their income on subprime loans and couldn't meet the payment when it doubled. So then they want to shove the loss off on the bank who shoves it off onto the taxpayers. Great way to destroy a nation. Reward the scofflaws and punish the responsible. How long do you think that formula will work out before everything collapses? If you screw up YOU should have to pay for it. Not me! Oh and forgiven debt certainly is considered income. Go ask the IRS if you don't believe me. If the IRS forgives debt that debt is fully taxable as income. Are you sure you live in America?
JustUs January 20, 2013 at 01:15 AM
LBV, what are you talking about? If you had equity in your home you could sell it and walk away with money in your pocket. Most people took out liar loans and were unable to keep up with the payments on their incomes so walked away and left the taxpayers holding the bag. Why should they be rewarded by allowing them to shift their costs off onto the taxpayers? When you reward the scofflaws and punish the good guys - the good guys are going to throw their arms up and become scofflaws. People will do whatever they are incentivized to do....and if that means cheat or steal....so be it. How do you think that will work out of America at the end of the day? We'll be lucky if we survive all the free cheese people. 47 million plus on food stamps alone! heh. 1 out of every 6. I WANT MY FREE LUNCH TOO, DARNIT!!!!
LBV Collins January 20, 2013 at 01:36 AM
Hi JustUs. I definitely understand what you're saying... that the irresponsible home buyers are getting a break while the responsible home buyer's aren't. (Heck, if we all had known that the forgiven bank debt wouldn't be taxed as income by the IRS, then maybe a lot more of us would have speculated in the housing market. Mmmm... Well... maybe.) But the perspective I'm looking at isn't about the speculator trying to quickly flip properties to score some quick profits. If a gambling speculator loses his bet, the government shouldn't give him a break. He took the risk and lost. End of story. He should lick his wounds and hope for better luck next time. But what I am looking at are those who bought a home that's now underwater and then lost their job because of a slow economy. These are the folks who have every intent of doing the right thing... honoring their debt obligation... but due to circumstances beyond their control, are now unable to afford their payment. They weren't speculating; They were living the American Dream. And I think that they shouldn't be punished by the IRS deciding that their forgiven debt is "income." Nonetheless, I definitely get your point. (Now what REALLY makes me mad as hell is that those who intentionally perpetrated this fraud on America... a handful of lenders... STILL have not been punished.)
Kori Jensen January 20, 2013 at 02:25 AM
JustUs, you need to read The Big Short then you might have a real understanding of what you are trying to talk about.
LBV Collins January 20, 2013 at 02:37 AM
Bingo, Kori!
JustUs January 20, 2013 at 03:05 AM
The idiot who had a $25,000 salary who got the $600,000 subprime loan is just as guilty as the bankers who gave it to him. Plus, many of these idiots took out huge HELOC loans on their equity to take cruises, buy new boats, gamble with, travel around the world, etc... Why should they get bailed out??? Wall Street bankers are crooks. I agree. But so at the homeowners who got way over their heads in debt and then pawned their mistakes off on the American taxpayers. I know if the story is too close to home that some people would get defensive here. But if it quacks, waddles and has feathers you gotta call it a duck.
Deborrah Henry January 20, 2013 at 05:14 PM
Having been in this business my entire life (and that's a loooong time)specially during the time when sub-prime lending was on fire, I'd have to say that my experience was that mostly people wanted to achieve the American dream of home ownership. I'd like to believe that the lenders and bankers began by trying to help others achieve that dream, but alas...GREED kicked in and the rest is history. I was doing some lending at the time and was wondering when the bubble was going to burst. It was a combination of things..people perhaps not understanding that they had to pay that loan back..bankers not understanding that the market could go down (to spite history) and lenders making it so easy to take the leap...rose colored glasses were issued with each loan. This was around the time the stock market was booming and the younger generation were becoming day traders. I believe it all plays a factor in the delusion we are all safe from greed, dishonesty, violence, negativity, corruption, weakness, cowardice etc. I also believe the only way to make a difference is to become honest, positive, optimistic, courageous, kind, giving and serviceful in our every day life so we show how it's done.
JustUs January 20, 2013 at 06:14 PM
" It was a combination of things..people perhaps not understanding that they had to pay that loan back..bankers not understanding that the market could go down (to spite history) and lenders making it so easy to take the leap...rose colored glasses were issued with each loan" Even though I don't see your bio under this blog, I appreciate your professional experience in 'the business'. Although most of this is about 'morality' and 'the rule of law', something that some of us have as much expertise in as you, if not more. To claim that someone who takes out a loan does not understand that they have to pay the loan back is absurd. Were they giving home loans out to 3rd graders? I though one had to be of legal age to obtain one. Bankers were giving out loans that they KNEW their clients would not be able to pay back, based upon their less than ideal credit histories and non-existent or low incomes. But they did it anyway. The big banks actually SHORTED the market when they sold the poisoned mortgage-backed securities (MBS) to unwary investors. They KNEW the market would blow up. Some of the executive risk managers warned the CEO's and were ignored. So, those were blatant acts of FRAUD that none were help criminally liable for. So much of it wasn't about "ignorance" at all, Ms. Henry. Those were WILLFUL ACTS where the outcome was practically guaranteed, but they did it anyway. It was about a lack of moral code and violations of the rule of law.
JustUs January 20, 2013 at 06:19 PM
Btw, Ms. Henry. I asked a question in a previous comment and you didn't respond. I heard that homeowners who sell their homes will be forced to pay a tax on the proceeds as a result of ObamaCare, so that we can fund free healthcare for millions. Do you know how much that tax will be (what percent of the gain) and when it takes effect? And if I am a homeowner who is forced to pay this tax, can I get free healthcare at any California ER like the illegals are allowed to? There should be a benefit to those who are forced to pay the tax. That's why I ask. Thank you in advance for your response.
Missy January 23, 2013 at 07:53 PM
What I find VERY interesting about this ENTIRE situation is that student loans are forgiven if a team of medical doctors renders an individual unable to work due to a TOTAL AND PERMANENT DISABILITY. However, while the loans do not have to be paid back because the individual cannot work and afford to pay, FEDERAL and STATE taxes are owed on the amount of the loans which is deemed to be income UNLESS the person is considered destitute. Just doesn't make sense to me ..... buy a house you cannot afford and all is well, but go to school, get an education, suffer a legitimate illness or injury that prevents you from working, and you owe MEGA taxes. ONLY in America.
Missy January 23, 2013 at 07:57 PM
I sold real estate for 8 years and believe every person who bought a house was told at the closing it had to be paid back. This is also listed on the Truth in Lending Statement. What ignoramus thought their American dream home was free?. That is just plain foolish!
JustUs January 23, 2013 at 08:13 PM
I agree with you, Missy. Socialist logic never made any sense to me either. IMO people who think that forgiven debt should not be taxed as income have a screw loose. Otherwise, why even worry about not complying with the CONTRACTUAL terms that one entered into when accepting a loan? Really screwy thinking.
JustUs January 23, 2013 at 08:18 PM
It's all a scam, Missy. I heard that if one happens to work for the government that student debt is forgiven after 10 years. But if you work in the private sector the student debt follows you for life!!! HAH! And student debt cannot be dissolved through bankrupcy. So the banker is incentivized to hand out high risk loans to bad credit risks because he makes his money and is guaranteed to get it back since all student loans are federally guaranteed! HAH! This is exactly how the housing market crashed!!! HAH! It's all so bizarre, Missy. But the socialist hand-wringers will NEVER give you ALL the FACTS. They will tell you only what THEY want you to hear!!! HAH! :^)
willi January 25, 2013 at 03:50 AM
Of course you can scam the system by becoming a perennial student. I know several people who have. One in particular comes to mind who is now in her 60's. She has no intention let alone means to pay it back. Her elderly 90+year old mother was forced to change her phone number due to continual harrassing calls from banks about the loans. Meanwhile, daughter has moved out of state.
Deborrah Henry January 25, 2013 at 11:42 AM
Do you believe the people in New Jersey should be helped by the government to re-build their homes? To me it's the same thing...we're in a period of time where the entire country is in a difficult situation and in order to keep the country in top financial and psychological shape, we should help one another get out of the mess we're in no matter who's to blame. Once the general population are strong again, back on their feet, feeling good about themselves and their country, feeling good about their futures, not resenting, fearing, hating, blaming or killing, they may have the desire to help others. If it takes helping an old lady stay active (I'm not promoting frauding the system), or helping people get their homes rebuilt so we don't have thousands of homeless people become a part of our culture, if it means lifting someone up while they are down for awhile (because I promise you it will all change AGAIN in a quarter of a century), then so be it! Visit India, or Africa, or the middle East and see what happens to people who don't lift each other up....
Deborrah Henry January 26, 2013 at 10:00 PM
http://signon.org/sign/stop-big-banks-from-getting.fb23?source=s.fb&r_by=842244 Petition to stop the banks from getting the tax break for foreclosure abuse deals
Deborrah Henry January 26, 2013 at 10:02 PM
I agree ... for some it is about moral code and violations of the rule of law, and for others it was watching their American Dream crumble.
Deborrah Henry January 26, 2013 at 10:14 PM
I have uploaded a PDF explaining taxation of Short Sales and Foreclosures to this blog.
Deborrah Henry January 26, 2013 at 10:16 PM
http://www.pbs.org/wgbh/pages/frontline/untouchables/ Great PBS special on The Untouchables talking about the Wall Street Crooks
JustUs January 26, 2013 at 10:26 PM
"Do you believe the people in New Jersey should be helped by the government to re-build their homes?" That is why people sell insurance policies, Ms. Henry. To help people rebuild after a disaster. If a homeowner lives in his home without insurance then why should I bail him out? He created his own problem. He should fix it. If one cannot afford to buy insurance one really should not own a home. Sell it and rent. Yes, the government should rebuild public roads and public facilities. But the government should not bail out private land owners. Responsibility means protecting one's OWN assets. When one lose them and do not have the insurance to cover the loss - shame on him or her. And don't come to me for a handout. "To me it's the same thing...we're in a period of time where the entire country is in a difficult situation and in order to keep the country in top financial and psychological shape, we should help one another get out of the mess we're in no matter who's to blame." You are promoting those who are self-sufficient and responsible to bail out those who aren't. That does not create a prosperous nation. Rewarding the irresponsible and punishing the responsible promotes a terrible incentive, Ms. Henry. It creates a nation of 'irresponsibles' and damages the integrity and the viablity of our society. People follow the incentives. If scofflaws are incentivized we will become a nation of scofflaws. Is that what you want?
JustUs January 26, 2013 at 10:31 PM
Knowing that you have the income to pay back a subprime loan when the terms adjust requiring a much higher payment is part of the 'moral code' that I am talking about, Ms. Henry. The 'moral code' is a two-way street that should not only apply to bankers.
Deborrah Henry January 26, 2013 at 10:43 PM
You explain your position very well...and I agree to a degree, and I don't promote "free handouts" to irresponsible people. I guess I'm talking about the heart of it all...people helping people when times are tough...not forever, just for the time being because it always seems to, over time, polarize back to the middle or the right or the opposite of where it seems to be at the time, eventually. For now, I think many people in our country need help..perhaps it's not the governments responsibility, but it's our responsibility as human beings to keep harmony amongst the masses, to help others when things are tough, and to keep it safe for all of us. Feeling safe, having enough food, having a roof over our heads...basic survival...is important to continue a harmonious society and culture. So I guess I'm advocating fix it now and change it later, if need be. So is it bailing out? or giving a helping hand or lift up? A lift up to get back on their feet so they can again be a productive contribution to our society...
Deborrah Henry January 26, 2013 at 10:52 PM
I don't agree...bankers are in the profession of screening people...the right people for the loan... people tend to trust their bankers to tell them if they can afford the house or not..based on their expertise... and at the time...the market was going up up up and everyone wanted a piece of the pie...put it into perspective...remember the buying frenzy? NO ONE ever thought it was possible that the market would tank...I have no idea why...because to me and others familiar with these markets, it could be logical...but since we've never experienced this kind of an economy...remember? the thinking? the denial?the times?
JustUs January 26, 2013 at 10:56 PM
Thank you for your response, Ms. Henry. And I think we may have found some common ground here. I think churches and charitable organizations should help the unfortunate like they have throughout our history instead of relying on government to fix all the problems. Today churches are directing the unfortunate to government social services instead of doing the heavy lifting by being part of the solution. We have 47 million people on food stamps. 1 out of every 6 Americans! That's atrocious! Perhaps it's time for the churches and charitable organizations to feed them instead! It is simply bankrupting our society! And with the HUGE debtload facing the younger generations it is virtually unsustainable mathematically. Unless we get a handle on the problem TODAY it will get much worse TOMORROW! But if people get themselves in financial difficulty by taking out loans that they cannot afford, wastefully spending the money that they have, living in an irresponsible manner, etc...the they are victims of their own actions and they should figure out a way to get themselves out of it! If someone is always there to save them, they never learn, Ms. Henry. They become perpetual scofflaws since there is an incentive to be one. People follow the inventives! Always!
Deborrah Henry January 26, 2013 at 10:59 PM
Here here!
JustUs January 26, 2013 at 11:05 PM
Oh, btw, Ms. Henry. Just so you know.....I place more responsibility on the Wall Street crooks and bankers - and our government officials who enabled them....than I do on the peasants who they gave loans to that couldn't possibly get paid back. Peasants are always going to take whatever you give them. The ones who gave them (no or low incomes, bad credit risks, etc...) the loans should have know better. But they WILLFULLY ignored the risks that would inevitably crash the economy. It was almost as if the whole thing was planned (perhaps it was. who knows?). So I hold the BIG BOYS most responsible for sure. But it took a village. And the peasants were part of that village. And that is why I must include them as part of the problem. That's as honest as I can get.
leanngillian February 10, 2013 at 07:39 AM
A Loan Modification is a permanent change in one or more of the terms of a Borrower's loan, allows the loan to be reinstated, and results in a payment the Borrower can afford.


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