Thanks to the California Association of Realtors (CAR) , mortgage debt forgiveness relief will now extend past 2013! Recently, The CAR received a letter from the California Francise Tax Board (FTB), indicating that homes in California lost to short sales are exempt from state income tax liability based on “debt forgiveness” that produced “phantom income” sellers never received from a short sale.
The Internal Revenue Service (IRS) sent a letter to California Senator Barbara Boxer, recognizing that the debt written off in a short sale is not recourse debt under California Law. This means the “cancellation of debt” income does not happen for the underwater homeowner when it comes to federal income taxes.Shortly after this announcement from the IRS, CAR sought a similar ruling by California FTB. They consented, and have now assured current underwater home sellers that they are not subject to state income tax liability.
This relieves thousands of distressed home sellers from California tax liability for debt written off by lenders in short sales. What does this mean? Even though the Mortgage Forgiveness Debt Relief Act of 2007 is coming to an end, distressed California homeowners will be able to avoid foreclosure or bankruptcy, and can opt for a short sale instead without incurring federal and state tax liability.
C.A.R. President Kevin Brown expresses the feeling of accomplishment felt amongst all C.A.R. constituents brought on by the good news. “We are pleased with the recent clarifications issued by the IRS and the California Franchise Tax Board, which protect distressed homeowners from debt relief income tax associated with a short sale in California.We would like to thank Sen. Boxer and BOE member Runner for their leadership in obtaining this guidance from the IRS and FTB.”
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