Sunday, April 11, 2010

State Lawmakers Pass 11th Hour Bill Allowing Many Californians To Dodge State Income Tax On Debt Forgiveness On Short Sales, Foreclosures, Loan Mods

In Sacramento, California, The Sacramento Bee reports:
  • Tax relief is on the way for thousands of fearful California mortgage borrowers. Most no longer face a double whammy of losing their homes – and then paying a big state tax bill on the forgiven debt. State lawmakers Thursday passed SB 401, a bill by Sen. Lois Wolk, D-Davis, to exempt borrowers who lost homes to foreclosure or short sales in 2009 from state taxes that can run into thousands of dollars. The same is true for certain types of loan modifications. State tax officials say 100,000 people statewide will be spared paying tax they otherwise would owe.(1) A spokesman for Gov. Arnold Schwarzenegger said he will sign the bill.

For more, see California won't tax forgiven home debt.

See also: Governor Gets What He Wants on Short Sale Tax.

(1) According to the story, the California Franchise Tax Board says the tax forgiveness measure mostly applies to people who refinanced their homes to get better interest rates or extract equity, and then had a short sale or foreclosure where debt was forgiven. But the tax board also warned that refinanced dollars taken out as cash and spent on items other than home improvements may be taxable.