By not signing the bill, struggling homeowners who sold their properties via a short sale in the past eight months will be penalized and forced to pay state income taxes on money they never received.
Under current state law, when a lender forgives mortgage debt in a short sale, the seller must pay state income tax on the amount of forgiven debt. The previous California exemption lapsed at the end of 2012, so forgiven mortgage debt on short sales that took place this year is considered taxable state income.
CAR noted that if the federal government does not charge federal income tax, the state should follow similar protocol. Senate Bill 30 conforms California tax law to federal tax law, which already says sellers can’t be taxed on forgiven mortgage debt.
The vote on SB 30 was along party lines with Democrats voting “no” and Republicans voting “yes.”
The Senate also decided earlier this year to link the enactment of SB 30 to a new tax measure in an effort to get CAR to support the bill, but this never happened.
“We are disappointed that California Assemblyman Mike Gatto, D-Pasadena, failed to show the leadership necessary to provide relief to distressed homeowners who are already in dire financial trouble,” said Don Faught, president of the California Association of Realtors.
“These are real families in real financial who may well be forced into bankruptcy by an unresponsive legislature. To heap an unfair tax bill on top of the pain and emotional duress of losing a home is unconscionable.”