How do you file for exclusion of COD income if you are elected the qualified principal residence indebtedness for federal purposes and insolvency for CA purposes? When you electronically file CA, does federal Form 982 get filed with the state?
California will only exclude the canceled debt income if the taxpayer filed bankruptcy or is insolvent.
You have to fill out the Canceled Debt Worksheet completely and answer ALL the questions accurately to get the correct figures to flow to where you want them.
You'll need to input ALL the figures on the Statement of Insolvency (Part VIII, QuickZoom button) to compute the excludable amount (if any).
NOTE: It appears that the bill is going to pass allowing CA to conform to the Federal rules on exclusion of COD for qualified principal residence. It hasn't passed yet, but it looks promising, so you may want to take this into consideration when preparing your clients return (maybe file for an extension or plan to amend once the bill has passed).
I completed all the worksheets, but it looks like the election you make covers both federal and California. I could not split the election treatment.
Canceled Debt Worksheet Line 42 and 43 both marked YES and it will do the Principal Residence Exclusion for Federal and Insolvency for California.
Thanks Nielan. I did that, but Form 982 has the insolvency box checked.
Because you're using the insolvency rule first, any gain not excluded by insolvency on the federal return (up to the limits, of course) will be excluded using the principal residence exclusion (if needed). The property should show up on Schedule D with zero gain/loss right?
Hopefully the governor is going to sign the bill that will make CA conform to the federal rules, and you'll be able to amend your clients state return (in case all of the gain on the CA return wasn't excluded through insolvency).
How would you handle a 2nd Form 1099-A that was not qualified principal indebtedness (took equity out)? The FMV is the same on both, but should be entered in only once.
I personally haven't tried this but can you input the 2nd 1099-A and link it to the same Canceled Debt Worksheet as the first, then it would be covered under the insolvency rule like the first?
I have entered all info and answered all questions for insolvency on federal but it's still not flowing into California. Any suggestions?
