Allows modifications reducing federal adjusted gross income for the purposes of tax on personal income by exempting any amount considered debt forgiveness

3 Co-sponsors

• Ruben Diaz
• George Onorato
• Antoine M. Thompson

Title of bill

An act to amend the tax law, in relation to allowing modifications reducing federal adjusted gross income for the purposes of tax on personal income

Purpose or general idea of bill

Provides relief to taxpayers who would otherwise owe additional State Personal Income Tax due to mortgage foreclosure. Adds a New York State Adjusted Gross Income (AGI) exemption when the cancellation of debt due to the mortgage foreclosure on a primary residence would otherwise result in increased State Income Tax liability.

Summary of specific provisions

Amends section 612(c) of the tax law.

Section 1 of the bill adds a new paragraph 39 to subsection (c) of section 612 of the tax law. Adds an AGI exemption for debt forgiveness from the sale by foreclosure proceeding of a taxpayer's primary residence.

Justification

Currently, if someone defaults on a mortgage and the bank sells the property for less than the mortgage value of the home, the difference is treated as taxable income by the State Department of Taxation and Finance (in the form of debt forgiveness). As a result, someone could owe a sizeable amount of State Personal Income Tax due to the mortgage foreclosure despite having lost equity in the home and their prior investment in the property.

While property values were increasing at an accelerated pace, it was less likely that a bank would sell a home (after foreclosure) for significantly less than the amount that had been owed on the mortgage. Even if there was a loss against the original sales price, Income Tax owed by the prior mortgage holder is only calculated after comparing the amount owed on the mortgage at the time of foreclosure with the price received by the bank on the foreclosed property. However, the recent market has brought two changes. First, property values are not (in general) increasing at the rate they were, and in some instances are declining. And, second, there has been an escalation in the number of low-equity mortgages (sometimes even exceeding 100% of the original sales price) and interest-only mortgages.

This legislation addresses this issue by adding an AGI exemption for the cancellation of debt due to mortgage foreclosure. The exemption only applied to primary residences.

Legislative history

2007: S.6454, Referred to Rules 2008: S.6454, Referred to Investigations

Effective date

January 1 in the year after becoming law.