California Will Not Tax Short Sale Forgiveness

Reblogger Jim Frimmer
Real Estate Agent with HomeSmart Realty West CalBRE #01458572

Great news for Californians!

Whatever you may think of homeowners who short sale their homes, especially in debt ridden CaliforniaThis is the latest information:  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.  Effective immediately, this bill generally aligns California's tax treatment of mortgage debt relief income with federal law. 

Many home sellers in California who had short sales comleted were exasperated to find out that the deficiency amount was taxed as income.

Example:  Original Mortgage:  $400,000, Short Sale amount, $250,000   Deficiency amount in this example would be $150,000.  That deficiency amount was being taxed as income in California.  Now the new bill that was signed does not tax this amount. 


"Qualified principal residence" indebtedness is defined as debt incurred in acquiring, constructing, or substantially improving a principal residence.  It includes both first and second trust deeds.  It also includes a refinance loan to the extent the funds were used to payoff a previous loan that would have qualified.

The tax breaks apply to debts discharged from 2009 through 2012.  Californians who have already filed their 2009 tax returns may claim the exemption by filing a Form 540X amendment.
Taxpayers who do not qualify for the above exemptions (e.g., second home or rental property) may nevertheless be exempt under other provisions.  Most notably, taxpayers who are bankrupt are exempt from debt relief income tax.  Also, taxpayers who are insolvent are exempt from debt relief income tax to the extent their current liabilities exceed current assets.

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

C.A.R. provides REALTORS® with many legal articles covering a wide range of topics of interest.  Some of the new or newly revised legal articles available at are as follows:

       .  Homebuyer Tax Credit Chart 2010.
       .  Internal Data Exchange (IDX).



Contact me for more information about life and living in the Temecula, Temecula Wine County, De Luz or Murrieta areas, or anywhere in Southwest Riverside County.  I am an experienced Real Estate Broker and have lived and sold Real Estate Here for almost 20 years!

Jane Grant
Broker of Record- DRE  01109492
Southwest Real Estate, Inc. 
Telephone:  866 621-0155

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Jim Frimmer

Realtor & CDPE, Mission Valley specialist
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