Federal law provides a tax exemption for debt forgiveness on a loan incurred for acquiring, constructing, or substantially improving a principal residence up to $2 million if the debt is discharged from 2007 through 2012.
The state has been slow to conform to the Fed. decision, but starting September 25, 2008, the federal income tax exemption for debt forgiven on a home loan now applies to state income taxes to a limited extent. Under the new California law, the maximum qualifying debt is only $800,000, not $2 million, and the maximum exclusion is $250,000. Moreover, the California law only applies to a debt discharged in 2007 or 2008. Not perfect...but better than nothing.
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