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Finally! California State Forgives Phantom "Income"
My colleague, Regina Brown, from San Luis Obispo, has given us a clear, concise report of the recent change in California law -- forgiven home debt is now treated by the state in a similar fashion to IRS law.
 
California won't tax forgiven home debt
Governor Schwarzenegger on Monday signed SB 401 (Wolk) into law providing distressed homeowners with state tax exemption on debt forgiven in a short sale, foreclosure, or loan modification.
MAKING SENSE OF THE STORY FOR CONSUMERS
SB 401 generally aligns California's treatment of taxes on forgiven mortgage debt with that of federal law.  For debt forgiven on a loan secured by a "qualified principal residence," borrowers now will be exempt from both federal and state income tax consequences.  Previously, California homeowners generally were exempt from owing federal taxes on the forgiven mortgage debt, but still were required to pay California taxes on the so-called "phantom income." Qualified principal residence indebtedness is defined as debt incurred in acquiring, constructing, or substantially improving a principal residence, including both first and second mortgages.  It also includes refinance loans to the extent the funds were used to payoff a previous loan that would have qualified under these guidelines. The tax relief ... more

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