Home Front

A blog about the economy and the Sacramento-area real estate market.

March 8, 2010
Bill to ban state taxes on forgiven mortgage debt goes to Gov.

A political showdown is on between the Legislature and governor regarding a bill to ban the state from taxing forgiven mortgage debt. Earlier this afternoon the bill cleared the state Assembly, offering potential tax relief to thousands of Californians who lost their homes in 2009.

"The feds don't do it and we're not going to do it, either," Assemblyman Charles Calderon, D-Montebello, said before a 47-27 vote that sent the measure to Gov. Arnold Schwarzenegger.

Just as it did Friday, Schwarzenegger's office signaled that he may veto the measure. The governor opposes an unrelated provision in the bill concerning tax refunds sought by corporations.

"Our position hasn't changed," said Schwarzenegger spokesman Mike Naple.

The Assembly vote ratified earlier state Senate approval of a measure that aligns many California tax codes with those of the federal government. One clause would eliminate state tax penalties for those who received loan modifications last year or did short sales.

In loan modifications lenders sometimes forgive a few months of payments. In short sales, they agree to sales prices below what they're owed to avoid foreclosing. The differences in both are considered forgiven debt for the homeowner and typically taxed as extra income.

It makes for a nasty surprise when you open the mail. Vacaville homeowner Mark Mosley said Monday he received a $21,000 tax bill last week for a $59,000 loan modification he received in 2009. He said his lender notified him he owes $13,000 to the federal government and $9,000 to the state.

But Home Front seriously doubts that Mosley owes the  federal taxes. The federal government has banned the IRS from taxing forgiven mortgage debt through the end of 2012. The state government had similar bans in place for the 2007 and 2008 tax years. But it hasn't yet extended the ban to the 2009 tax year. Several real estate watchers say they believe banks and lenders are mailing their so-called "1099" forms to everyone involved regardless of whether they owe or not. It's up the homeowner to sort it out.

While every homeowner's case can be different, typically those who live in the homes they own can avoid being taxed for forgiven debt. Lawmakers called it a fairness issue Monday, arguing that people having mortgage hardships shouldn't also get hit with a big state tax bill.

"We should provide relief to those who are struggling and at risk of losing their homes," said Assemblywoman Mariko Yamada, D-Davis.

Schwarzenegger opposes a clause that penalizes businesses for seeking some tax refunds. Businesses say it's often hard to calculate what they owe the state, and thus, overpay to avoid stiff penalties. But Democrats say some companies unfairly seek state tax refunds that they aren't owed.

We'll keep you posted here on the outcome. If this bill gets vetoed there are others in the wings to offer protection to homeowners. It's a fairly good guess this will pass eventually.


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