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Does California tax forgiven mortgage debt when the IRS does not?

It can. California generally does not give the same break as the federal rule for home loan debt canceled in 2026. So debt the IRS lets you leave out may still count as income on your California return. The federal break generally covers only debt canceled before January 1, 2026, or canceled under an arrangement made and put in writing before that date, so for many people both may tax it unless another exception applies.

By Guillermo Serafin, broker and owner of Serve First Realty. Updated October 2026.

Why do California and the IRS treat forgiven debt differently?

California writes its own income tax rules. Sometimes it follows the federal rules, and sometimes it does not, and both sets of rules have changed many times over the years. So something that is tax-free on your federal return can still be taxed on your California return, or the other way around.

Do not assume. Check first. Because California and the IRS do not always follow the same rules, talk with a tax professional before you count on any tax break or make a decision based on one. Relying on the wrong rule can lead to a tax bill you did not see coming.

What about debt forgiven in 2026?

The federal break for qualifying main home debt generally covers debt canceled before January 1, 2026, or canceled under an arrangement made and put in writing before that date. A bill in Congress, H.R. 917, would extend it, but it had not passed as of October 2026. California generally does not give the same break for debt canceled in 2026. So for most people, debt forgiven in 2026 may be taxable on both returns unless an exception below applies.

Where does it show up on the California return?

California residents use Schedule CA (540) to list differences from the federal return. The FTB's 2025 instructions say to enter forgiven mortgage debt from your main home on line 8c, column C, when you left it out on your federal return. This adds it back for California.

If you did not leave it out on your federal return, there may be nothing to add back. A tax professional can tell you what fits your case.

Which exceptions does California still allow?

  • Bankruptcy. The FTB lists debt discharged in a bankruptcy case as a common way to leave out canceled debt.
  • Insolvency. If your debts were more than the value of everything you owned right before the debt was forgiven, you may leave out some or all of it. The FTB points to the worksheet in IRS Publication 4681. See our insolvency worksheet walkthrough.
  • Nonrecourse debt. The FTB says that, generally speaking, forgiven nonrecourse debt does not create tax from canceled debt income. See recourse vs. nonrecourse loans.

What should I do if I may owe California tax?

  • Find your Form 1099-C and check that the amount is right.
  • Ask whether your loan was recourse or nonrecourse. Box 5 on the form shows whether the lender says you were personally liable.
  • Fill out the insolvency worksheet using values from right before the debt was forgiven.
  • Ask a tax professional to look at both your federal and California returns. Free help may be available through the IRS VITA program at 800-906-9887.
  • Read the full picture in Will I owe taxes after a foreclosure or short sale?

General information, not tax or legal advice. We are not tax professionals. Sources: California Franchise Tax Board Mortgage Forgiveness Debt Relief page (updated 12/17/2025), FTB 2025 Instructions for Schedule CA (540), FTB Publication 1001 (2025), IRS Publication 4681 (2025), Form 1099-C (Rev. 4-2025), and H.R. 917 (119th Congress).

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