California homeowners who have had debt forgiven via a short sale, foreclosure or loan modification won’t have to pay taxes on the forgiven debt. SB 401 recently signed by Governor Schwarzenegger provides a state tax exemption to homeowners on debt forgiven in a short sale, foreclosure, or loan modification. Federal laws already protect homeowners from owing federal taxes on forgiven debt.
The tax relief applies to forgiven debts in the tax years 2009-2012. It applies to owner-occupants with a qualified principal resident. The relief includes both first and second mortgages and includes refinance loans to the extent the funds were used to payoff a previous loan that would have qualified under these guidelines. Second home owners or rental property owners do not qualify in most circumstances.
The California Tax Franchise Board expects the tax relief will impact nearly 100,000 California residents.
To find out if you qualify, contact your tax adviser.