For thousands of Californians who did a short sale or had mortgage debt forgiven via a modification in 2009, Monday is a big day.
The Sacramento Bee reports California tax law unsettled on home sellers’ short sales
Monday, the Assembly is scheduled to vote on SB32 X8, a bill by Sen. Lois Wolk, D-Davis, that would ban the state from taxing mortgage debt forgiven in 2009.
But Schwarzenegger is threatening to veto the bill over an obscure clause opposed by business groups. That clause establishes new tax penalties on firms that file unfounded claims for refunds. Business associations believe it will unfairly punish them for tax withholding decisions they claim are difficult to calculate. The clause, along with forgiven mortgage debt, is among dozens in the bill to align California’s tax codes with federal codes.
The governor wants the business penalty provisions stripped from the bill, said his spokesman Mike Naple.
“The governor would prefer that the provision be taken out of the bill and addressed in separate legislation,” Naple said.
The state gave homeowners who occupied their homes a pass on forgiven mortgage debt in 2007 and 2008. The federal government, meanwhile, has backed off on taxing forgiven mortgage debt through the end of 2012. In the past, both branches of government treated forgiven debt as taxable income.
Forgiven similar legislation has passed before and this will almost certainly pass again, with or without this extra clause. Still, I’m sure many of us will sleep better after it’s signed.
Greg Fielding
Best I can tell purchase money loans are excluded
from taxation in California, it’s the recourse, I.e. Refi etc that will get
hit. This is my understanding from our CPA based
on his read of the CA code.
Yup…you’re right Peter. Purchase money loans are excluded.
But if you refinanced or took out a HELOC you could be in trouble.
Hope all is well BTW,
-Greg
What if the HELOC was used to make the purchase of the home?