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Merlo
Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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I had a short sale of my condo in 2009, after divorce. That

Customer Question

I had a short sale of my condo in 2009, after divorce. That was my primary residence.
Now, I have received a 1099C for cancellation of debt from Wells fargo Bank.
It says on the form that BARROWER IS NOT LIABLE.
When I tried to file my taxes (Turbo Tax), the 1040 did not consider the $44,000 1099C as income, and it went through with no problem, but state (form 540) took over that amount and calculated as income.
How that can happen? did I do something wrong? Many of my friends with accounting knowledge are surprised.
Thanks
Leon
Submitted: 7 years ago.
Category: Tax
Expert:  Merlo replied 7 years ago.

Hello JA Guest,

 

It looks as though from your post that you are a resident of the state of CA. If that is the case, CA does not honor the same exemption on the exclusion of debt from a short sale or foreclosure as the IRS does.

 

The only way to exclude the debt from CA taxes is if you can show that you were insolvent at the time the debt cancellation occurred. Proving insolvency means you must be able to show that your liabilities exceeded the total value of your assets. If you think you would qualify under the insolvency rules, you would file Form 982 with your federal tax return and attach the worksheet they provide to show how you arrived at your insolvency status.

 

If this was helpful please press the Accept button. Positive feedback is also appreciated.

 

Thank you JA Guest

 

 

Merlo and other Tax Specialists are ready to help you
Customer: replied 7 years ago.
But the form 982 is part of IRS and not the state. As I mentioned the IRS honored the exemption. Besides, I have a settlement money from the divorce, which exceeds the short sale amount, how is that going to work?
Expert:  Merlo replied 7 years ago.

Hello again JA Guest,

 

I realize that form 982 is part of the IRS forms. But since the state of CA does not honor the same exclusion on debt canceled on your primary residence as the IRS does, the only way you can exclude this from your CA taxable income is if instead of claiming the automatic exclusion, you instead file for exclusion under the insolvency rules. You would need to do this for both your federal and state returns in order for this to apply in the state of CA.

 

If you had settlement money from the divorce which would make it impossible for you to show insolvency, then you may have no choice but to pay CA state taxes on this canceled debt.

 

I am sorry I could not give you an answer with a better outcome, but unfortunately CA does not honor the exemption allowed by the IRS on debt canceled on your primary home, which is why Turbo Tax is including that as part of your state taxable income.

 

If this was helpful please press the Accept button.

 

Thank you JA Guest