California has enacted legislation that largely conforms California law to the federal tax provisions that allow taxpayers to exclude from tax certain mortgage debt that was forgiven through foreclosure or debt restructuring. This change is retroactive to January 1, 2009, and provides a significant benefit to affected taxpayers who may be able to remove up to $500,000 of previously-reported debt discharge income on their state return. The CA Franchise Tax Board estimates approximately 100,000 Californians may be impacted by this change.

The California Conformity Act of 2010 provides tax relief to homeowners for debt discharges occurring on or after 1/1/2009 and before 1/1/2013. The chart below summarizes revised California law, compares the changes to prior state and applicable federal law, and provides reporting guidance.

Item	Federal	California Prior Law	Prior reporting	California New Law	Reporting Change
Mortgage debt relief upon sale or other disposition of principal residence general exclusion	For 2007-2012 Income from discharge of indebtedness on a principal residence is excluded from taxable income.	CA partially conformed to federal provisions for 2007 and 2008 only.	Enter the amount of debt relief for federal purposes as an add-back on Schedule CA (540 or 540NR), line 21f, column C. Schedule CA(540)	Partial conformity – see item by item comparisons below	The applicable amount entered as an add-back on Schedule CA will be limited to amount of debt that is not excludable for CA purposes based upon limits below.
Maximum amount of qualified principal residence indebtedness	$2,000,000 for most taxpayers; $1,000,000 for taxpayers who file as MFS.	N/A	N/A	$800,000 for most taxpayers; $400,000 for married or RDP taxpayers filing separately.
Maximum amount of debt that can be excluded	No limit on amount of debt relief; limited only by limit on qualified debt	2009 and later years: No exclusion 2007 and 2008: Exclusion limited to $250,000 for most taxpayers/ $125,000 for married/registered domestic partner (RDP) filing separately	N/A	Limits debt relief to $500,000 for most taxpayers; $250,000 for married/registered domestic partner (RDP) filing separately

For more information: California guidance and instructions; Franchise Tax Board News Release 10-22