California’s to Send Notices to Select Taxpayers with Cancelled Debt

The Franchise Tax Board began sending tax notices to some taxpayers who have received a 1099-C form for cancelled debt for 2007 or 2008. Depending on the circumstances, cancellation of debt may be taxable income to the recipient.

California conforms to the Mortgage Forgiveness Debt Relief Act of 2007. It allows taxpayers to exclude from income any qualified mortgage debt that was cancelled by their lender resulting from a foreclosure, “short sale”, or loan modification. However, the rules for California are different. The amount of qualified mortgage debt is less than the federal amount, and California has a lower allowable exclusion.

Under both laws, debt forgiveness on other properties, such as second homes, rentals, investments, or other business properties, is not excludable from income.

The FTB is sending notices to taxpayers who may have COD income on “non-qualifying properties”. They are investigating whether this COD income should have been included on the taxpayers’ tax returns for 2007 & 2008. They advised taxpayers this COD income may still be excludable under other provisions, such as insolvency or bankruptcy. Taxpayers are urged to reply promptly in order to avoid further action by the FTB, such as audits, penalties, and/or tax assessment.

If you receive this notice from the FTB, and have any questions, contact our office.


Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999