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Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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My husband and I did a short sale on our property in California

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My husband and I did a short sale on our property in California in december 2009. We know that we do not have to pay federal taxes on the forgiven amount. How do we know if the IRS section 121 applies to us and if we will have to pay California taxes on the forgiven amount. We are considering filing for insolvency. Thanks.

Hello nick,


If the property was your primary residence, then the IRS is allowing taxpayers to exclude the amount of the their canceled debt from being part of their taxable income. However, the state of CA does not allow that same exclusion.


In order to exclude the amount from being part of your CA taxable income, you would have to file claiming the insolvency exclusion for it to also apply to your CA taxes.


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


Thank you nick



Customer: replied 7 years ago.
Will I need to file for insolvency with my federal tax paperwork before completeing and sending in my CA state paperwork? I moved to Maryland in May of 2009. Will I have to do the same thing for my Maryland tax return or is the home sale only an issue when filing my California tax return. Thanks.

Hello nick,


Yes, you will have to file for insolvency first on your federal return before sending in your CA state paperwork. That excusion will then automatically apply to both states.


If this was helpful please press the Accept button.


Thank you nick



Edited by Merlo on 3/1/2010 at 9:09 PM EST
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