Non Recourse Loans (see CCP 580b)
Short Sales and Taxation by the State of California has become a little less risky.
In July of 2009 the California wrote this in one of their tax newsletters
"The most common situations when a foreclosure or a short sale does not result in cancellation of debt (COD) income involve a non-recourse loan. A non-recourse loan means the lender’s only remedy in case of default is to repossess the property the lender cannot pursue you personally in case of default. A purchase money loan (that is, a loan taken to “purchase” your home) is generally considered to be a non-recourse loan in California. Refinances, second mortgages, and “cash out” loans are generally recourse loans."
http://www.ftb.ca.gov/professionals/taxnews/2009/July/Article_9.shtml
This was a very important clarification of their position. There had been a debate regarding how the FTB would treat short sales of non recourse loans. In fact in the early part of 2009 the California Franchise Tax board was telling people on the phone they would have to pay taxes on the 1099 income.
I know this is a fact because one of sellers with an approved short sales opted to take a foreclosure rather than risk the tax burden to California. ( I suggested they call because they were asking very good questions about the applicablity of IRS tax law to California.)
for more info on
Taxation of Short Sales in California
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