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Good morning. Good news....no tax
. First, although typically debt forgiveness results in taxable income, under the Mortgage Forgiveness Debt Relief Act of 2007, taxpayers may exclude debt forgiven on their principal residence if the balance of their loan was $2 million or less. The limit is $1 million for a married person filing a separate return. Details are on Form 982 and its instructions. The law
has now been extended through the end of December 2013. Second, California is a non-deficiency state where you would not have personal liability for the shortfall. You only have debt forgiveness where you have a recourse loan. If nonrecourse, you are not being forgiven because you owe nothing personally. In some cases, although inappropriate for the lender to issue a 1099-C in a non-recourse state...which is the notice the IRS is given that there has been forgiven....some lenders nonetheless issue them. Should yours do so, you can contest the 1099-C or File the Form 982. Typically in these situations, the Form 982 is the path of least resistance.
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