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Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 6167
Experience:  Extensive Experience with Tax, Financial & Estate Issues
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Good Afternoon, I am filing married separate. I live in California

Customer Question

Good Afternoon, I am filing married separate. I live in California and my husband lives in Kansas. We received a 1009-C - for mortgage for a property located in California, which was our main residence. I understand because of the Mortgage Forgiveness Debt Relief Act and Debt Cancellation extension through 2015, in regards ***** ***** i have no tax liability. But this has not been extended for the state of California. So my question is how do i enter the cancellation of debt on my California taxes, so that both my husband and myself are responsible for the tax liablilty if we are filing separate, but is filing in a different state.
Thank you
Submitted: 7 months ago.
Category: Tax
Expert:  Stephen G. replied 7 months ago.
Well, first of all in CA, while the Mortgage Forgiveness Debt Relief Act and Debt Cancellation law has not been extended for CA purposes, that doesn't mean that there isn't another "out" for CA purposes. Are you aware of the Anti-Deficiency Provision of Section 580(e) of the CCP? If not, here's an excerpt from an explanation authoredby Kevin Hardin of McCarthy Law PLC, of Scottsdale, AZ 85251:In 2011, California enacted an anti-deficiency provision under section 580e of the CCP, which generally prohibits a lender who holds a deed of trust on a homeowner’s principal residence from either claiming a deficiency or obtaining a deficiency judgment from the homeowner after agreeing to a short sale. The statute effectively limits the homeowner’s liability to the amount the lender received on the sale of the principal residence, and the homeowner is not personally liable for the deficiency balance (the difference between the loan balance and the sales price). 580b Applying protection to foreclosures.The reason why it is important to differentiate whether a loan is recourse or non-recourse is not just because it affects whether the lender can sue the homeowner. This distinction also has profound effects on the tax consequences. If, as in almost all instances of purchase money mortgages in these states, a loan is non-recourse, it will not lead to cancellation of debt income and therefore cannot be covered by the Mortgage Debt Forgiveness Act.Instead, what happens is that the amount of non-recourse debt is considered to be the sale price of the property. In other words, the true sale price is ignored and is instead replaced with the amount remaining on the non-recourse loan. That is a difficult concept to grasp. Essentially, the United States Supreme Court ruled that because the lender cannot pursue the borrower for any outstanding deficiency there is no debt to forgive. However, just because a mortgage is non-recourse does not mean the homeowner is off the IRS’s hook. Instead the total amount of the debt immediately prior to the foreclosure or short sale will be considered the sale price. The adjusted basis (AB) is the purchase price less any depreciation plus the cost of any major improvements. The taxpayer’s gain or loss is the difference between these two numbers.One last point worth considering on non-recourse debt: if the taxpayer has owned and used the property as a principal residence for periods totaling at least two years during the five year period ending on the date of foreclosure/short-sale, then the taxpayer may exclude up to $250,000 ($500,000 for married couples filing jointly) from income. Any excess must be reported as capital gains. If you find that this anti-deficiency provision doesn't applies to you, then you simply don't have to make any adjustment to your federal income for CA purposes for the COD income excluded from your Federal income by the exclusion you claim on form 982 for your federal return. On the copy of Federal Form 982 that is filed with your CA return, I would simply note on the top of the form:"NOTE: FOR CA PURPOSES, THE CANCELLATION OF DEBT INCOME OF THE NON-RECOURSE MORTGAGE HAS BEEN EXCLUDED FROM CA INCOME UNDER THE ANTI-DEFICIENCY PROVISION OF SECTION 580(e) OF THE CCP."Also, since the IRS has the ability to tax 100% of the COD income to either of the parties to the mortgage, you should include 100% of the COD income in your separately filed return, absent an agreement with your husband to include 50% of the amount in a Form 982 filed with a Non-Resident CA separate return if he is going to file such a return, which seems unlikely absent any other CA source income.Steve G.
Expert:  Stephen G. replied 7 months ago.
Yes you can, but you'll need to obtain an extension of time to file your income tax return until you meet the required time limits.A regular automatic extension of time to file your 2015 income tax return (Form 4868) will take you all the way to October 15, 2016. If your husband meets the third test below, no further extension would be necessary. If not, then you would be able to obtain another extension to a date 30 days after you meet the first test below.These are the tests for the Foreign Income Exclusion:To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must have foreign earned income, your tax home must be in a foreign country, and you must be one of the following:A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year,A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, orA U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.
Expert:  Stephen G. replied 7 months ago.
Please excuse the above posting; the computer changed pages on me and won't let me erase it. Sorry.
Customer: replied 7 months ago.
Does it matter if the 1099_C was for the second mortgage and / or the fact that we tried to short sale but home went into foreclosure before we could
Expert:  Stephen G. replied 7 months ago.
No except for the fact that there are two components to the transaction; the 1099-C and the foreclosure as noted above in the anti-deficiency provision with respect to the possible capital gain on the foreclosure and the forgiveness under the primary residence exclusion.Steve G.
Customer: replied 7 months ago.
So, how would I put the statement on an electronic file.NOTE: FOR CA PURPOSES, THE CANCELLATION OF DEBT INCOME OF THE NON-RECOURSE MORTGAGE HAS BEEN EXCLUDED FROM CA INCOME UNDER THE ANTI-DEFICIENCY PROVISION OF SECTION 580(e) OF THE CCP."Thank you
Expert:  Stephen G. replied 7 months ago.
You'll have to file a paper return, unless your software allows you to attach a general supporting schedule. However, I recommend that in these instances you file a paper return.Steve G.
Customer: replied 7 months ago.
If I file for an extension for state, is it necessary to file an extension for federal also. Thanks
Expert:  Stephen G. replied 7 months ago.
No. Here's the CA info:State Income Tax (Franchise Tax Board)If you can't file by April 15, you have an automatic six-month extension to file your return until October 15. You don't have to file a written request to receive the extension because it's paperless. However, the extension to file does not mean an extension to pay. Use Payment Voucher for Automatic Extension for Individuals (FTB 3519) if you owe tax and are unable to file your tax return by April 15.

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