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So tell me if I'm understanding you both, please.

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?

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?

Thanks for the clarification.

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