California Income Tax Archives

URGENT – IRS and FTB Update Regarding Short Sales

in 1099 taxes, Anti-deficiency laws, California real estate, California tax exemption, Debt forgiveness, Deed in Lieu, Distressed Homeowners, Foreclosure, Foreclosures, Form 982 tax exemption, Homeowners Exemption, Insolvency Exemption, Mortgage Debt Relief Act, Mortgage Deficiency, Non-recourse loan, Personal Residence, Principal residence, Purchase Money Mortgage, Recourse loan, SB 458, Senate Bill 30, Senate Bill 391, Short sale, Underwater/by Brian Ripley

The California Association of Realtors yesterday issued a press release stating that, as a result of recent rulings by the Internal Revenue Service and California Franchise Tax Board, mortgage debt forgiven in a California short sale is no longer taxable as income.

This is huge news, since the tax exemption for this income tax was scheduled to expire on December 31, 2013 when the Mortgage Debt Relief Act expired. Without these rulings from IRS and FTB, California homeowners whose short sales did not close by year end were facing potentially enormous tax liability.

The IRS ruling was contained in a letter to Senator Barbara Boxer. The FTB ruling was in a letter obtained the C.A.R. from Board of Equalization member George Runner.

The rationale for the rulings appears to be that debt forgiven in a short sale is not considered “recourse” debt under California law, thus exempting it from taxation.

The C.A.R. press release does not state whether this ruling also will apply to short sale of non-primary residences in California, or if it is limited to only certain types of mortgage debt. I have requested my tax experts to review the actual letters and updated regulations to clarify these issues; I will provide that response immediately upon receipt.

At this point, it appears that similar protections will be extended to homeowners whose properties are foreclosed after December 31, 2013 where the debt forgiven was used to buy, build, or make substantial improvements to a primary residence. It does not appear these protections will apply to “deed in lieu” transactions.

California homeowners with pending short sales may breathe a sigh of relief. For these folks, it would appear that Christmas came a few weeks early this year.

SB 30 Update

in 1099 taxes, Anti-deficiency laws, California real estate, California tax exemption, Debt forgiveness, Distressed Homeowners, Form 982 tax exemption, Homeowners Exemption, Insolvency Exemption, Mortgage Debt Relief Act, Mortgage Deficiency, SB 30, SB 391, Senate Bill 30, Senate Bill 391, Short sale/by Brian Ripley

Just a quick update on the status of the California “debt forgiveness” tax measure:

As previously reported, the California Senate passed the California Association of Realtors-sponsored tax relief bill without a single “no” vote on June 20. The bill was then referred to the state Assembly, where it continues to languish. A hearing on the bill is scheduled before the Assembly’s Revenue and Taxation committee on August 12, 2013.

As also reported, the bill as currently drafted remains linked to Senate Bill 391, which imposes new fees for the recording of real estate documents, and which SB 30-sponsor CAR opposes. This means SB 30 will fail unless SB 391 also passes, or unless the two bills are unlinked. SB 391 is also scheduled for a hearing on August 12, 2013 before the Assembly’s Housing & Community Committee.

Stay tuned….

SB 30 Still Mired in Legislative Limbo

in Anti-deficiency laws, California real estate, California tax exemption, Debt forgiveness, Distressed Homeowners, Homeowners Exemption, Insolvency Exemption, Mortgage Debt Relief Act, Mortgage Deficiency, Non-recourse loan, Personal Residence, Principal residence, Recourse loan, SB 30, SB 391, Senate Bill 30, Senate Bill 391, Short sale, Underwater/by Brian Ripley

Hard to believe it’s now been more than 6 months since Senator Ron Calderon introduced Senate Bill 30 on December 3, 2012. The bill passed an important hurdle late last week following passage by the Senate (36-0), and has now been to the Assembly’s Revenue and Taxation Committee.

A recent amendment to the bill has created significant controversy and resulted in loss of support from its initial sponsor and strongest supporter, the California Association of Realtors.

Specifically, the bill as currently drafted now requires the passage of a separate piece of legislation, Senate Bill 391, also passes: “This act shall become operative only if Senate Bill 391 of the 2013–14 Regular Session is enacted and takes effect.”

SB 391 would establish a $75 per document recording tax to fund an affordable housing trust fund. C.A.R., according to a recent press release, is opposing SB 391 “because it unfairly adds to the cost of recording real estate documents.”

It remains to be seen whether the State Assembly will further amend SB 30, including, possibly, the removal of the SB 391 link. Any differences between the Senate and Assembly versions will be resolved in a concurrence committee made up of members of each house. The Governor will have thirty days to sign or veto the bill.

Meanwhile, sellers of underwater properties, or owners facing foreclosure, remain uncertain whether, and to what extent, they may face state tax consequences related to the transfer of their homes. Certainly, a prompt resolution of the legislative impasse would bring welcome and needed clarity to a currently muddied real estate market.

SB 30 Passes Major Milestone

in Anti-deficiency laws, California real estate, California tax exemption, Debt forgiveness, Distressed Homeowners, Foreclosure, Foreclosures, Form 982 tax exemption, Homeowners Exemption, Insolvency Exemption, Mortgage Debt Relief Act, Mortgage Deficiency, Non-recourse loan, Personal Residence, Principal residence, Principle reduction, Purchase Money Mortgage, Recourse loan, SB 30, Senate Bill 30, Short sale, Underwater/by Brian Ripley

Senate Bill 30, the bill to reinstate the California state tax exemption for cancelled or forgiven mortgage debt of qualified homeowners, passed a major hurdle on May 23, 2012, when the legislation was passed out of the Senate Appropriations Committee by a 7-0 vote.

While the bill still requires a vote by the full senate, as well as Governor Brown’s signature, the likelihood of ultimate passage of the bill seems much higher following the unanimous approval by this very key committee.

As background, the previous tax exemption expired on December 31, 2012, and has remained mired in the legislative weeds while the governor and legislature battle over other state funding priorities. The result has been significant uncertainty in the “distressed property” market, with real estate professionals and “underwater” homeowners lacking clarity on whether there would be state income tax consequences following a short sale, foreclosure, deed in lieu of foreclosure, or other mortgage debt cancellation event.

(The federal tax exemption for qualified homeowners was renewed in February 2013, and remains in place through the end of this year.)

If passed, the bill will amend Section 17144.5 of the California Revenue and Taxation Code, to provide for a one-year extension of the state tax exemption for certain cancelled mortgage debt. It is not expected the exemption will be renewed again, so that any homeowner seeking its protection must conclude her/his transaction by December 31, 2013. Since a short sale can take several months to close, it is recommended that individuals considering this option immediately consult with a qualified real estate professional, as well as seeking advice from experienced attorney and tax adviser.

Still No News on SB 30 (StateTax Exemption for Forgiven Mortgage Debt)

in 1099 taxes, California real estate, California tax exemption, Debt forgiveness, Distressed Homeowners, Foreclosure, Foreclosures, Form 982 tax exemption, Homeowners Exemption, Mortgage Debt Relief Act, Mortgage Deficiency, Personal Residence, Principal residence, SB 30, Senate Bill 30, Short sale/by Brian Ripley

As scheduled, the state legislature’s Appropriations Committee held a hearing earlier this month to determine the fate of Senate Bill 30. As a reminder, this is the bill that, if passed, would restore the state tax exemption for the “shadow income” homeowners are imputed to have received if their home is foreclosed or sold in a short sale. That exemption expired on December 31, 2012.

Unfortunately, the committee chose to “table” consideration of the bill to a later date. Specifically, the bill was placed in the AC’s “Suspense File”, to which the committee sends any bill with an annual cost of more than $150,000. Suspense File bills are then considered at one hearing after the state budget has been prepared and the committee has a better sense of available revenue. No testimony is presented – either by the bill’s author or any witness – at the Suspense File hearing.

At present, we have no definitive date on which the Suspense Bill hearing will occur. And the current high volume wrangling between the governor and the legislature over education funding makes it unlikely a final vote on SB 30 will occur pending resolution of these other political “hot potato” budget issues. Stay tuned.

California Short Sale Tax Exemption Hearing Scheduled

in 1099 taxes, California tax exemption, Debt forgiveness, Form 982 tax exemption, Homeowners Exemption, Mortgage Debt Relief Act, Mortgage Deficiency, SB 30, Senate Bill 30/by Brian Ripley

California Senate Bill 30, which will reinstate the state tax exemption applicable to cancellation of qualified mortgage debt, is scheduled for a hearing before the Committee on Appropriations on April 8, 2013.

The bill was previously amended by the Committee on Government & Finance, following which it was approved by a 6-0 vote, subject to approval by the Appropriations Committee.

If the bills successfully emerges from the Appropriations Committee, it will be scheduled for a vote by the full legislature and, if passed, sent to Governor Brown for signature.

As amended, the bill will provide for reinstatement of the state tax exemption retroactive to January 1, 2013 and through December 31, 2013, mirroring the expiration of the federal 982 homeowners’ exemption. Stay tuned….

Important Update on Status of California Short Sale Tax Issue

in 1099 taxes, California real estate, California tax exemption, Debt forgiveness, Distressed Homeowners, Fiscal Cliff, Homeowners Exemption, Mortgage Debt Relief Act, Mortgage Deficiency, SB 30, Senate Bill 30, Short sale, Uncategorized, Underwater/by Brian Ripley

I wrote last week that the federal tax exemption for mortgage debt forgiveness had been extended for one year as part of the “fiscal cliff” settlement between Congress and the White House.

California’s Homeowners Exemption has Expired

At that time, I also wrote that the California tax exemption expired on December 31, 2012, without having been extended by the state legislature. Consequently, mortgage debt forgiveness is currently subject to California state income tax.

Senate Bill Introduced to Reinstate the California Exemption

To remedy this inconsistency between federal and state tax law, the California Association of Realtors is sponsoring Senate Bill 30 (Calderon, D-Montebello). SB 30 will conform state law to the federal law passed last week. Upon passage of SB 30, the measure as currently drafted will be effective retroactive to Jan. 1, 2013.

Contact Your Local State Representative

If you believe the state tax exemption should be reinstated, contact your local state senator and ask that he/she support SB 30.

I will report further as the bill moves its way through the legislative process.

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