At the beginning of the year, I wrote about how The Mortgage Forgiveness Debt Relief Act had been extended to the end of 2013.
In short, the Act states that homeowners who sell their primary residence in a short sale or lose their home due to foreclosure will not have to pay taxes on the loss up to $2 million ($1 million if married filing separately).
Although this is good news to anyone facing a short sale or a possible foreclosure this year, unfortunately for those living in California, California law does not yet conform to the federal law.
Last Friday, Senate Bill 30 which would have made California tax law conform to the federal tax law failed to pass out of the Assembly Appropriations committee.
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So what does this mean for California homeowners facing a short sale of foreclosure this year?
Currently, as the California tax law reads, you will be taxed on any debt forgiven by a lender due to a short sale or foreclosure.
The debt forgiven will be considered earned income.
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I agree with the California Association of Realtors President who said, “We are disappointed that California Assemblyman Mike Gatto (D-Pasadena) failed to show the leadership necessary to provide relief to distressed homeowners who are already in dire financial trouble. These are real families in real financial need who may well be forced into bankruptcy by an unresponsive legislature. To heap an unfair tax bill on top of the pain and emotional duress of losing a home is unconscionable.”
It appears that for some reason this bill was also linked to another senate bill that many lawmakers did not support, and that may be the reason this bill was voted down.
Obviously, this vote is a major setback for anyone facing the possibility of a short sale or foreclosure this year.
That being said, California has conformed to the Federal Mortgage Forgiveness Debt Relief Act since it was enacted in 2007. The Act has now been extended on the federal level twice, and the first time it was extended California took quite a long time before conforming with the extension.
I am hopeful that California law makers will reconsider, but obviously we don’t know yet what they will decide, and anyone in this financial situation should plan accordingly.
–Written on September 4, 2013.