The following information was kindly provided by a client of mine who is a tax professional.
Here are a couple of important notes regarding Cancellation of Debt (COD):
1. The Mortgage Forgiveness Debt Relief Act of 2007, only applies to “Qualified Principal Residence Indebtedness”, not to second or vacation homes, investment property or rentals. Further, the debt must have been used for the purchase or substantial improvement of the residence – not to pay off credit cards, start a business, take a vacation, buy a car, etc.
2. Those not qualifying for forgiveness of COD, can generally avoid paying tax by filing under the Insolvency clause, or one of the other eight exceptions.
3. Different elections can be made on the Federal return and the California return, which helps in the non-conformity issue.
Bottom line, very complex area; individuals with this problem should see a qualified professional tax preparer.
K.E. Noland, EA, President
Enterprise Management Corp. CFO TO GO®
17461 Irvine Blvd., Suite M, Tustin, CA 92780
Tel: (714) 505-1925 / Fax: (714) 505-9691
ken@companycfo.com / www.companycfo.com
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