Home Front

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

April 5, 2010
Freedom from taxes on forgiven mortgage debt imminent

It is looking better for thousands of Sacramento homeowners hit with big state tax bills for mortgage debts forgiven in 2009. Representatives of state lawmakers said Monday they plan to cancel those state tax obligations with vote Thursday in the Assembly and Senate.

Legislation forgiving the taxes would go immediately to Gov. Arnold Schwarzenegger, who has regularly said he supports the idea.

There is a lot of politics under the bridge with all this. Let's just say that Californians who got unexpected tax bills of $10,000 or more in recent weeks could soon be off the hook. Most are borrowers who received loan modifications last year or lost their houses to short sales. In all cases, lenders forgave some of the debts owed them, a process that opens them to taxes.

Home Front has taken numerous calls in recent days with people freaking out over $10,000 state tax bills as the April 15 tax deadline looms. We''ve been able to reassure them that they probably won't have to pay it. Many across the state are anxiously waiting for the state to resolve the issue - or have filed extensions while waiting.

Typically the state and federal governments view forgiven home loan debt as additional income and tax it accordingly.The bill being considered this week, SB401, would forgive state tax obligations for forgiven mortgage debt through the 2012 tax year. Same as the feds have already done.

SB401 is being amended today for a hearing Tuesday in the Assembly Revenue and Tax Committee and Wednesday in Assembly Appropriations. It is set for a full Assembly floor vote Thursday. The Senate plans a full floor vote, as well, if all stays on track. Then it would go to the governor. It's possible this will all be done by the end of the week, just days ahead of April 15.

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