California has enacted a new law, SB 401, which state that Californians no longer have to pay tax on forgiven debt that is part of a short sale, foreclosure or loan modification.
It must be forgiven debt on a "qualified principal residence" This law will apply to debts discharged from 2009-2012. If you already filed 2009 taxes you can file for 540X to amend the return.
This is a big relief to homeowners doing a short sale on their home. For example, if you a homeowner owes $500,000 and sells the property for $400,000 in a short sale, that $100,000 difference, may be subject to state taxes. The federal government passed the "Debt Relief Act", which eliminates the federal taxes, but there was still the state tax. Under this new law, the homeowner will not be taxed in California, which could be a big relief.
I spoken with my CPA, as well as a couple of others regarding taxes on a short sale, and they said even without these new laws, many are exempt from paying taxes due to other issues such as insolvency. In other words, the property owner doing a short sale likely has debt exceeding their assets, making them exempt from paying additional taxes.
Whenever taxes are concerned, I always advise home owners to consult with their tax professional as each individuals financial situation is unique.
Michael Bloch
Certified Distressed Property Expert
Lifestyles Real Estate
Realtor, GRI, CDPE
Office 831.420.2100
Cell 831.588.1588
E-Fax 831.854.0600
www.AtHomeInSantaCruz.com
www.ShortSalesInSantaCruz.com