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California canceled debt addback in Lacerte (Form 1099-C)

SOLVEDby IntuitLacerte Tax2Updated July 14, 2022

This article will assist you with understanding the CA Mortgage Forgiveness Debt Relief (Mortgage Debt Exclusion) instructions and process in Lacerte.

Per the FTB Instructions for Schedule CA (540):

Mortgage forgiveness debt relief. California law does not conform to federal law regarding the exclusion of income from discharge of indebtedness from the disposition of your principal residence occurring after December 31, 2017. Enter the amount of discharge on line 8f, column C.

Refer to the FTB Mortage forgiveness debt relief article for more information.

California no longer allows the exclusion for TY15 or TY16. Entering the cancelation of debt income will create the addback on Schedule CA, line 21f.

Per the CA Form 540 Instructions (page 5):

Mortgage forgiveness debt relief: California law does not conform to federal law regarding the discharge of indebtedness from the disposition of your principal residence occurring on or after January 1, 2014. Enter the amount of discharge on line 21f, column C.

Assembly Bill No. 1393
CHAPTER 152

An act to amend Section 17144.5 of the Revenue and Taxation Code, relating to taxation, and declaring the urgency thereof, to take effect immediately.

[ Approved by Governor  July 21, 2014. Filed with Secretary of State  July 21, 2014. ]

To apply the new treatment,

  1. Navigate to Screen 51 Modifications
  2. Check the appropriate box in Section AB 1393- Mortgage Forgiveness Debt Relief

LEGISLATIVE COUNSEL'S DIGEST

AB 1393, Perea. Personal income taxes: income exclusion: mortgage debt forgiveness.
The Personal Income Tax Law provides for modified conformity to specified provisions of federal income tax law relating to the exclusion of the discharge of qualified principal residence indebtedness, as defined, from an individual?s income if that debt is discharged after January 1, 2007, and before January 1, 2013, as provided. The federal American Taxpayer Relief Act of 2012 extended the operation of those provisions to qualified principal residence indebtedness that is discharged before January 1, 2014.
This bill would conform to the federal extension, discharge indebtedness for related penalties and interest, and make legislative findings and declarations regarding the public purpose served by the bill.
This bill would declare that it is to take effect immediately as an urgency statute.

To enter the Cancelation of debt of qualified principal residence exclusion for federal purposes and generate an amount on line 21f, column c on Schedule CA:

  1. Go to Screen 14.1, Miscellaneous Income
  2. Scroll down to the Alimony and Other Income section
  3. Enter the applicable amounts under the Cancelation of Debt subsection in:
    • Cancelation of debt (1099-C) code 6
    • Qualified principal residence exclusion code 7
    • Both entries are required to generate the exclusion on the Federal Form 1040

To enter a CA Short Sale and Cancelation of Debt per the FTB Tax News:

  1. Go to Screen 14.1, Miscellaneous Income
  2. Scroll down to the Alimony and Other Income section
  3. Enter the applicable amounts under the Cancelation of Debt subsection in:
    1. Cancelation of debt (1099-C) code 6
    2. Qualified principal residence exclusion code 7
  4. Check the box, COD income attributable to short sale pursuant to CCP section 580e [CA] code 180
    • This field was added on the 02/19/14 update for a lender approved short sale in 2013 subject to CCP section 580e which will remove adjustment on the CA Schedule CA line 21f.

California law conforms, with modifications, to federal mortgage forgiveness debt relief for discharges that occurred in tax years 2007 through December 31, 2012. The amount of qualifying indebtedness is less than the federal amount and California imposes a state-only limitation on the total amount of relief excluded from gross income. The following summarizes the differences between the federal and California provisions. Federal provision applies to discharges occurring in 2007 through 2012, and:

  • Limits the amount of qualified principal residence indebtedness to $2,000,000 for taxpayers who file as married filing jointly, single, head of household, or widow/widower, and to $1,000,000 for taxpayers who file as married filing separately.
  • Does not limit the debt relief amount; it only limits the indebtedness amount used to calculate the debt relief amount.
  • See the federal law Home Foreclosure and Debt Cancelation for more information.

California provision applies to discharges that occurred in 2007 through 2012.

Tax years 2009 through 2010

  • Limits the amount of qualified principal residence indebtedness to $800,000 for taxpayers who file as married/registered domestic partners (RDP) filing jointly, single, head of household, or widow/widower, and to $400,000 for taxpayers who file as married/RDP filing separately.
  • Limits debt relief to $500,000 for taxpayers who file as married/RDP filing jointly, single, head of household, or widow/widower, and to $250,000 for taxpayers who file as married/RDP filing separately.

Tax year 2009

As of April 23, 2010, a program update was released to include the California cancelation of debt conformity calculation.Two checkboxes have been added to Screen 51.011 to indicate if the provisions are being applied on a return not yet filed, or the second for a return already filed that is being amended. The two checkboxes are:

  • Apply mortgage forgiveness debt relief (original return to be filed)
  • Apply mortgage forgiveness debt relief (original return was filed under pre-SB 401 law)

If a return is being amended for this conformity calculation:

  1. Go to input Screen 59, Amended Return and choose California.
  2. Go to input Screen 51.011 and check the box Apply mortgage forgiveness debt relief (original return was filed under pre-SB 401 law).
  3. The California 540X will now calculate with the new conformity law.

Tax year 2008

The Qualified principal residence exclusion field on Screen 14.1 (code 7) correctly reduces the CA income.

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