California has brought its tax code up to match the federal standards when dealing with short sales, foreclosures and loan modifications.
Under Senate Bill 401, homeowners who have or will experience one of these potentially-taxable situations can rest assured that government finally believes that if you can't afford to pay on the loan, there is certainly no way you can afford to pay taxes on $200,000 that you never made in the first place.
In order to qualify for the tax relief, the home must be a qualified principle residence (no rental properties). Aslo, the debts must be discharged from January 1, 2009 through December 31, 2012.
Californians who have already filed 2009 taxes, besides being much more organized than myself, can take advantage of this new law by filing a form 540x amendment.
If your situation involves a second home or rental property, you may still be exempt. The most common exemptions are for those who are either bankrupt or otherwise insolvent.
This bill should assist many homeowners in the San Diego area, as home values have seen major decline, some as high as 60% over the last 3 years. Prices in many communities of Chula Vista are back down to 2002 price levels, so anyone who purchased a home in the last 8 years runs the risk of being upside-down.
For more information about mortgage forgiveness tax consequences, go to California Franchise Tax Board's Mortgage Forgiveness Debt Relief Extended webpage and the Internal Revenue Service's Mortgage Forgiveness Debt Relief Act and Debt Cancellation webpage. The full text of Senate Bill 401 is available at www.leginfo.ca.gov