no more state taxes for 1099 income on shortsales!

FINALLY! now at least when you shortsale your house, you won't lose your house AND have to pay state taxes!


With just seven days until Tax Day on April 15, the State Legislature and governor finally have an agreement on a bill to provide tax relief for short sales.

Both houses of the Legislature today passed Senate Bill 401 by Sen. Lois Wolk, D-Davis, which provides tax relief for mortgage debt forgiveness for tax years 2009 through 2013. Just moments ago, Gov. Arnold Schwarzenegger’s staff told the Orange County Register that he will sign the legislation.

“This is a great example of what we can accomplish when we work together to solve problems for Californians,” said Aaron McLear, the governor’s spokesman, in an email. “This bill will protect homeowners from unfair taxes.”

For weeks now, Schwarzenegger and the Legislature have been arguing over what to do about mortgage debt forgiveness. You see, California allowed a tax liability waiver for mortgage debt forgiveness to expire at the end of the 2008 tax year, even though the federal government’s waiver remains in place. That meant that starting in 2009, mortgage debt that your lender forgave would be taxed, like income, at the state level.

If you’re one of the thousands of Californians who sold your home at a loss in what is commonly known as a short sale, that would have put you on the hook for a big tax bill come April 15 — even though you no longer own your home.

Anyway, twice before the Democrat-controlled Legislature had approved a bill that would have offered such tax relief, but the governor vetoed both of them because the bills included a provision that created penalties for businesses and wealthy taxpayers who claim higher tax refunds than they know they’re actually entitled to.

Finally, this week, the Legislature put forward the bill by Wolk, which included the mortgage debt relief but excluded the provision Schwarzenegger opposed alongside the California Chamber of Commerce and the California Manufacturers and Technology Association.

But even without that provision, the bill only passed with two Republican votes (by State Sens. Dave Cox of Fair Oaks and Roy Ashburn of Bakersfield) because it included some new provisions that increase penalty and interest payments for individual taxpayers. This new version of the bill, which gained the support of the chamber and the association, is opposed by the Howard Jarvis Taxpayers Association.

“We’ve contaminated this bill with some sort of compromise between some sort of parties who decided that tax increases should be part of this bill,” said Assemblyman Kevin Jeffries, R-Riverside. “It has taken a very good bill … and ruined it, killed it, with tax increases. I urge a no vote.”

In the end only one Orange County lawmaker voted for the bill, Assemblyman Jose Solorio, D-Santa Ana, although many others expressed support for the mortgage debt forgiveness piece. Californians who sold their home in a short sale will now not be on the hook for additional taxes.