Any forgiven mortgage debt (whether due to foreclosure or short-sale) will not be taxable income on one's federal taxes, but will be taxable income on one's California taxes. [provided the debt is incurred/forgiven between the relevant dates of 1/1/07 and 12/31/09 and is less than $2 million and is for a primary residence] Correct?Correct.One does not need to be bankrupt or insolvent in order to be exempt from federal income tax, only in order to be exempt from California state income tax. Correct?Correct.It is quite possible - and it will certainly happen in practice - that someone will qualify to exclude their debt forgiveness from their Federal taxes but not from their California taxes. And there will also be a number of people for whom the new law is irrelevant - who would qualify for non-taxable treatment of their debt forgiveness under the law as it existed before this 2007 change.And the old law will still help investors and speculators who are bankrupt or insolvent and who don't qualify for relief under the new law.--PeterPS - For those who need the insomnia cure, this is all in Internal Revenue Code section 108.
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