Assembly passes bill to waive income tax on forgiven mortgage debt

March 9, 2010

Homeowners whose mortgage debt is reduced by lenders during foreclosure proceedings would not have to pay income tax on the forgiven amount under legislation passed by the Assembly Monday and sent to Gov. Arnold Schwarzenegger. The bill, SB 32 x8 , extends the tax exemption through 2012 and increases the amount that can be excluded from taxes from $250,000 to $500,000. The federal government already provides a similar exemption.

The mortgage debt provision is part of a measure by Sen. Lois Wolk that conforms state tax law to a number of recent federal changes. Schwarzenegger vetoed a similar measure last year because Democrats including provisions in it that he and Republicans in the Legislature did not support. This bill may face the same fate.

The state had this exemption in place for two years but it expired and needs to be renewed by lawmakers to remain in effect. It would apply to loan modifications that forgive several months payments and also to short sales where lenders agree to prices below the amount owed on the mortgage.

This Sacramento Bee article recounts the story of a Vacaville homeowner who received a federal form in the mail from his bank notifying him that he could owe $9,000 in state taxes because of a $59,000 loan modification.

To see the full bill and recent staff analyses, go here.

Photo by Respres.

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