BILL ANALYSIS                                                                                                                                                                                                    Ó




                   Senate Appropriations Committee Fiscal Summary
                            Senator Kevin de León, Chair


          AB 1393 (Perea) - Personal Income Tax: Income Exclusion:  
          Mortgage Debt Forgiveness
          
          Amended: June 15, 2014          Policy Vote: G&F 5-0
          Urgency: No                     Mandate: No
          Hearing Date: June 23, 2014     Consultant: Robert Ingenito 
          
          This bill meets the criteria for referral to the Suspense File.


          Bill Summary: AB 1393 would extend the state exclusion of  
          mortgage forgiveness debt relief for one additional year,  
          through 2013. 

          Fiscal Impact: The Franchise Tax Board (FTB) estimates that AB  
          1393 would result in General Fund revenue losses of $35 million  
          in 2013-14 and $4 million in 2014-15.

          Background: Debt that is forgiven or cancelled by a lender is  
          generally treated as income on a tax return, and is thus  
          taxable. Current law generally requires a taxpayer to include a  
          cancellation of debt as taxable income in the year in which the  
          "discharge of indebtedness" occurs, with specified exceptions.   
          Existing federal law, the Mortgage Forgiveness Debt Relief Act  
          of 2007 (MFDRA), initially excluded qualified principal  
          residence indebtedness that is discharged from January 1, 2007  
          through December 31, 2009 from federal taxable income. The  
          exclusion was subsequently extended through January 1, 2013, and  
          most recently extended a third time (through January 1, 2014).  
          Married taxpayers filing jointly may exclude up to $2 million in  
          qualified principal residence indebtedness that is forgiven by a  
          lender, while married persons filing separate or single  
          taxpayers may exclude up to $1 million. California law provided  
          a partial exclusion until January 1, 2013, with the following  
          exceptions:

           Taxpayers may only exclude from their income up to $250,000  
            (single filers)/$500,000 (joint filers) of cancelled debt.
           Taxpayers may only exclude indebtedness on loans up to  
            $400,000 (single filers)/$800,000 (joint filers). Taxpayers  
            must first reduce any amount excluded for state tax purposes  
            by any debt forgiven on loan amounts above these thresholds. 








          AB 1393 (Perea)
          Page 1




          Proposed Law: AB 1393 would continue the State's modified  
          conformity to MRDFA for discharges of qualified principal  
          residence indebtedness until January 1, 2014 

          Staff Comments: This bill would provide income tax relief to  
          distressed homeowners by allowing borrowers who have negotiated  
          a cancellation of debt by a lender as a result of restructuring  
          a mortgage loan or a short sale on a principal residence to  
          exclude the amount of forgiven debt from income for state tax  
          purposes. The exclusion applies to the forgiveness of debt  
          incurred to purchase, construct or improve a principal  
          residence, as defined.

          The FTB's estimate of revenue loss employs a "top-down"  
          methodology that begins with the exclusion's estimated revenue  
          loss nationally (prepared by the Joint Committee on Taxation)  
          and then applies "California factors" to determine the amount of  
          the estimated loss that would occur in California.