Is California growing a conscience?

Foreclosures, Short Sales, Loan Modifications and Taxes

With so many California residents suffering from the economic downturn, loosing their homes to foreclosure, short sales and loan modifications, I’ve found it very disappointing that California would not follow suit with the Federal Governments Mortgage Debt Forgiveness Relief Act.
The Federal provision bans the IRS from taxing forgiven mortgage debt however California does not.
Following a forclosure, short sale and some loan modifications the borrower or home owner’s lender which forgave them of a debt would in turn issue them a 1099 which would then be considered as additional income to the borrower.

Meaning you took out a loan for $300,000.
Sold your home in a Short Sale for $200,000.
Although the lender forgives the $100,000, for tax purposes it is as if some one gave you $100,000 to make this work. Which in turn you now owe taxes on the $100,000.

You see the Federal Government realized that the individuals being affected here are those that are the worst off. The Bill exempted borrowers from paying taxes on forgiven mortgage debt at the Federal level.

For California it’s a different story. The State of California did comply with this for 2007 and 2008 but decided not to extend this. Meaning many Chula Vista, San Diego and California residents who had either gone through foreclosure, sold their home in a short sale or entered into a loan modification were subject to income taxes on the forgiven amount. Needless to say with California home prices being hit among the hardest in the Nation, these tax bills are in the tens of thousands of dollars.

Well there’s great news.
Governor Schwarzenegger said he would sign SB401 which was approved by the legislature late Thursday.
This Bill would align California tax code with federal law. Which means no more taxing of forgiven debt for California.

This is a tremendous relief for those barely hanging on, knowing they would be able to make financial decisions without the worry of Taxes as pertaining to both State and Federal.