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After more than a year of political wrangling, the Assembly gave final approval Thursday to state income tax relief for beleaguered homeowners who sold their homes on short sales or obtained loan modifications from their lenders last year.

However, the tax exemption for "debt foregiveness" will apply only to those transactions that occurred in 2013, and homeowners who paid taxes on debt reductions they obtained last year would have to file amended tax returns to obtain refunds. The state estimates that the legislation will save taxpayers about $39 million overall.

The federal government exempts debt relief from taxation and the state followed suit in previous years, but a bill that would have extended it to 2013 became ensnarled a year ago in a complex political power play.

Senate Bill 30 passed the Senate easily, but only after Senate President Darrell Steinberg insisted on an amendment that make its enactment contingent on passage of another bill, Senate Bill 391, which would have imposed a fee on real estate transactions to finance low-income housing.

It was aimed at forcing the California Association of Realtors, which opposed SB 391, to back off its opposition because the Realtors sought the tax relief measure.

Tying the two bills together produced a stalemate in which neither could gain approval and the effort to renew the tax exemption for debt forgiveness carried over into the 2014 legislative session with several new bills being introduced.

Ultimately, Assembly Bill 1393, carried by Assemblyman Henry Perea, D-Fresno, was sent to Gov. Jerry Brown's desk, with the Assembly's 68-0 vote the final action on Thursday, just before the Legislature went on a month-long recess.

In addition to exempting forgiven mortgage debts from taxation, the bill also protects homeowners from penalties "regardless of whether the taxpayer reports the discharge on his or her income tax return for the 2013 taxable year," as an Assembly analysis puts it.

It would take another bill to exempt debt forgiveness that occurs in 2014.

PHOTO: Real estate agent Pat Quan, of Coldwell Banker puts flyers in front of one of his home listing in El Dorado Hills, Calif, on Wednesday, October 09, 2013. The Sacramento Bee/Manny Crisostomo



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