In 2007 the federal government issued legislation that, under the right circumstances, eliminated tax liability for mortgage debt forgiveness. Many states, including California, followed with similar bills of their own.
Most states tied their bills to sunset at the same time as federal legislation.
California’s legislature, however, decided to have their bill sunset after two years — in 2009. It was their assumption that they would be able to pass a new bill before the old bill lapsed.
Since the old bill expired, the legislature and the governor have not been able to come to an agreement on a replacement bill.
If no replacement bill is signed into law by this year’s April 15th tax deadline, any mortgage debt forgiven in 2009 will be considered as income in the State of California.
So if you made $60,000 last year, and if you sold your home in a short sale at a loss of $200,000, then the State would expect you to pay tax on a 2009 income of $260,000.
If you live in the Anaheim Hills area — or anywhere in California — and you sold your home in a short sale at any time from 2009 to the present (or are contemplating a short sale in the near future), you should discuss the particulars with and obtain advice from your financial and tax advisors.
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