California's Short Sellers Expecting Tough Tax Hit For 2013

A state bill designed to give troubled homeowners in California a tax break if they sell their homes via short sale in 2013 has gone nowhere.

Senate Bill 30 (D-Calderon) stalled in committee, and the state's legislative session ended last week.

The California Association of Realtors has criticized the lack of movement. 

"Homeowners who sold their homes in a short sale ... will be further penalized by being forced to pay state income taxes on money they never received," the organization said in a released statement. 

Under current state law, when a lender forgives mortgage debt in a short sale, the seller must pay state income tax on the amount of forgiven debt. California had an exemption in place, but that lapsed at the end of 2012. As a result, at this point, forgiven mortgage debt on short sales occurring in 2013 is considered taxable state income. 

The federal government does not charge federal income tax on the forgiven debt up to a certain amount under the Mortgage Forgiveness Debt Relief Act and Debt Cancellation.

"Senate Bill 30 conforms California tax law to federal tax law, which already says sellers can’t be taxed on forgiven mortgage debt," the C.A.R. continued in the statement.

"To heap an unfair tax bill on top of the pain and emotional duress of losing a home is unconscionable," C.A.R. President Don Faught said in the released statement. "These are real families in real financial need who may well be forced into bankruptcy by an unresponsive legislature.” 

According to the text of SB 30, the bill would only have become operative if SB 391 -- California Homes and Jobs Act of 2013 -- were enacted and took effect. SB 391, introduced by Democratic Senator Mark DeSaulnier, also stalled in committee.