Mortgage Debt Relief Act - Is it applicable in California?

The Mortgage Debt Forgiveness Tax Relief Act has been effective in California since mid 2008. It offers tax break on canceled debt or deficiency (in short sale or foreclosure).

Debt Relief Act - how it applies to short sale/foreclosure

If you're unable to afford the current mortgage payments, and it isn't possible to refinance with FHA Secure, then you may consider going for a short sale. A short sale is quite common in a declining market where the home sale price isn't enough to cover the outstanding balance on your mortgage. In such a situation, you have a personal liability to pay off the remaining balance on your loan.

Let's say, your lender accepts a short sale, and there's a combined mortgage (purchase loan and second mortgage) on your home. Now, the lender may not ask for the deficiency (difference between unpaid loan balance and price at which lender sells off your property) on the primary mortgage. This is due to the Anti-deficiency laws applicable to mortgages on a primary residence. But, such laws are not applicable in case of second mortgages. Therefore, you can avoid paying deficiency on the first but not on the second.

Now, if it is a refinance loan, the lender will ask for the deficiency if the short sale doesn't yield much to cover the combined debt (purchase loan and refinance mortgage). In case you fail to pay the deficiency, the unpaid amount is considered as income and the IRS requires you to pay federal income tax on the unpaid debt unless you don't qualify for mortgage tax relief under the Federal Mortgage Debt Relief Act (Mortgage Forgiveness Debt Relief Act of 2007). However, the Mortgage Debt Forgiveness Tax Relief Act can help you with tax relief only under certain conditions.

The Mortgage Debt Relief Act applies even if your property is foreclosed and there's a deficiency amount left to be paid. However, if you opt for a deed-in-lieu, the lender may not ask for a deficiency in most cases, as is the general rule.

Earlier the Mortgage Debt Relief Act applied to all states except California. However, it is now applicable to California also with some difference in the rules as compared to the Federal Law.

California Debt Relief Act and the Federal law - how they differ

California law applies to qualified debt forgiven in 2007 and 2008. It limits:

Amount of qualified principal residence indebtedness up to $800,000 for married/registered domestic partners filing jointly or as single, head of family or as widow/widower.
The amount of principal residence indebtedness up to $400,000 for married/registered domestic partners filing separately.

The debt relief is limited to:

$250,000 for married/registered domestic partners filing taxes jointly, single, head of family or as widow or widower.
$125,000 for married/registered domestic partners filing their tax returns separately.

Federal Mortgage Debt Relief Act applies to qualified debt forgiven right from 2007 to 2012. It limits:

Amount of qualified principal residence indebtedness up to $2,000,000 for married/registered domestic partners filing jointly or as single, head of family or as widow/widower.
The amount of principal residence indebtedness up to $1,000,000 for married/registered domestic partners filing separately.

The Federal law does not limit the debt relief amount. It only limits the amount of indebtedness used to find out the debt relief amount.

For further information, you may refer to the following resources:

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suen64

Joined: 21 May 2008
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Post subject: Mortgage Debt Relief Act 2007

Has this Act taken affect in California yet? Thanks

blake

Joined: 07 May 2008
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Post subject:

It is Federal Legislation so I assume it has taken affect. It was passed in August. It just protects against the forgiven debt from being taxed as income. "FHA Secure" may also be what you are looking for?

"FHASecure expands the FHA's ability to offer refinancing by giving it the flexibility to work with homeowners who have good credit histories but cannot afford their current payments. By the end of 2008, the FHA expects this program to help more than 300,000 families refinance their homes."
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suen64

Joined: 21 May 2008
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Post subject: Non Recourse Loans?

thanks. On another note...I have a first and 2nd on my home (primary res. no other property owned) and both mortgages we used to purchase my home, they have never been refi'd, they are both with the same lender. I bought the home in 6/2006. Are both of my loans non-recourse loans or could the 2nd mortage get a DJ against me for the loan amount on the 2nd?

blake

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Post subject:

My education tells me they would both only be secured by your home but that is a really good question. I am nearly sure they are both non-recourse loans but could it be governed differently in California?

I don;t think so but I asked Cliff...
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suen64

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Thanks! I look forward to Cliff's answer. Best, *sue

blake

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What are you trying to accomplish?
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suen64

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Post subject:

I"m trying to find out what recourse the lender has against me if I try to work out DIL or short sale and avoid foreclosure. I know that with foreclosure they can't come back on me for more. But with the DIL or SS I want to know what they have legal right to do. If both loans are non-recourse I have a bargaining chip to avoid the foreclosure process since the outcome will be the same. In that case, either they agree to a DIL and forgive the debt and call it good, or they foreclose and add their foreclosure costs on top of the debt the they have to forgive. However, if my 2nd is a recourse loan, then I don't have that bargaining chip and if they can come after me for the loan balance on the 2nd, then BK gets put on the table. Of course I'd like to avoid that...

blake

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Post subject:

With the DIL the second mortgage could possibly still be attached. So I would say the Short Sale will be a much better option for you. When you work with someone who really knows how to do a short sale they will take care of the second. For many reasons, it is extremely important that you work with someone that really knows the short sale process well.
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suen64

Joined: 21 May 2008
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Post subject:

Thanks!

larry

Joined: 27 Jun 2007
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Post subject:

Hi suen. The Mortgage Debt Relief Act 2007 or Mortgage forgiveness Act does not apply in California. So if your debt is forgiven then you will have to pay tax on it as it will be considered as your income. BTW know more about Tax Break for Mortgage Debt Forgiveness at http://www.mortgagefit.com/tax/debtforgiveness-reliefact.html Best of luck, Larry

SueN

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Post subject:

Thanks Larry. I spoke to FTB the day after I asked this question. So the Mortgage Debt Relief Act 2007 only applies to Federal Taxes but not State, as you say. So, there would be no Fed taxes but there would be State. That said, I spoke to a BK Atty who told me that since both of my loans are purchase money loans, which makes them non-recourse loans, I wouldn't be liable for the taxes either. Is that your understanding as well? Thanks, *sue

Jessica

Jessica

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Post subject: RE: tax on non recourse loan - mtge debt relief act

Hi Suen, Nice to have you back here. But did you get logged out while posting? I think there's a slight confusion here. It is true that the tax on unpaid debt is a kind of federal tax and not state tax. And in case of a purchase loan, one doesn't need to pay the deficiency if he's in California (anti-deficiency law). But just because the Mortgage Debt Relief doesn't apply here, one has to pay tax on any unpaid deficiency amount. I hope I could clarify it. If you have further doubts, please don't hesitate to discuss with us here. Regards, Jessica _________________ http://jessica.mortgagefit.com/

Azngirly

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Post subject: Forclosures

I am thinking of walking away from my home. I have a first and second. I intend on paying the second. I have another home that is co tenants, that I will moving back too. Can they come after me for that home?

Niicss

Niicss

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Post subject:

Hi Azngirly! It is good that you will be paying off the second mortgage. But if you do not pay the first mortgage, the first lender will foreclose the property. The first lender may also place liens on your other properties if his debts are not recovered. There are chances that the lender may garnish your wages as well. Thanks. _________________ Good is the Enemy of Great.