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How to calculate taxes on debt forgiveness?

Discussion in 'Foreclosures' started by mass effect, Apr 29, 2010.

  1. mass effect

    mass effect LoanSafe Member

    I live in California and am wondering how I would estimate how much money I would have to pay in taxes if the debt is forgiven.

    House is worth $45,000 I owe $128,000. $20,000 of this was cash for home improvements.
  2. lisasxr

    lisasxr LoanSafe Member

    You may be liable for federal and state tax. The actual tax due would depend on your actual tax bracket. I don't know for sure, but highest tax brackets for CA are around 10% and Fed is around 33% - again I don't know these for sure.

    You will also be given a qualified principle residence exclusion to offset a portion of the 1099-C
  3. mass effect

    mass effect LoanSafe Member

    Are you saying I may be liable for fed and state tax because I might not qualify for the debt relief forgiveness act due to my loan being RECOURSE?
  4. lisasxr

    lisasxr LoanSafe Member

    Cancellation of debt income isn't impacted by recourse or non recourse loan status.
    You may qualify for the debt relief forgiveness act - depends on if they continue to extend it.
    You may also qualify under the insolvency rule (your liabilities are greater than your assets) - thus making it non-taxable.
    The above information was to help you prepare for what could happen.
    No one can tell you exactly what to expect as there are too many factors between here and there.
  5. mass effect

    mass effect LoanSafe Member

    Thank you for all of your replies I really appreciate it. You have been very helpful and I am extremely greatfull.
  6. mass effect

    mass effect LoanSafe Member

    I found an article on this California Waives State Taxes on Forgiven Mortgage Debt

    Excerpt from Article

    The law brings California state tax policy largely in line with the federal Mortgage Forgiveness Debt Relief Act of 2007, which is in effect through the tax year 2012.
    There are some exceptions though. Debt forgiveness on a second home mortgage, business property, or investment property does not qualify for exclusion under the new state law. Refinance loans that allow cash-out equity are also excluded.

    Hmm looks like I won't be off the hook for taxes. Dang it.
    Can anyone confirm this?
  7. miked2023

    miked2023 LoanSafe Member

    So if your house cost more than 500K you're on the hook for taxes on the remaining balance? How much is that? Just CA income tax? My house was 590K and I file married. thanks!!

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