California Short Sale Tax Break Bill Approved, But At What Cost?

SB 30 was linked by the committee to another bill that Realtors, as well as the county recorders, assessors and the title industry, oppose. Image: ThinkStock

When the California Senate Appropriations Committee approved Senate Bill 30, which would extend existing provisions of state law protecting homeowners from having to pay income tax on a short sale, this was supposed to be positive news for Realtors and homeowners. But this was not the case.

In a surprise amendment, SB 30 was linked by the committee to another bill that Realtors, as well as the county recorders, assessors and the title industry, oppose.

That measure, Senate Bill 391, sponsored by Sen. Mark DeSaulnier, D-Concord, would enact the California Homes and Jobs Act of 2013. This is meant to spur job creation, boost the state’s business competitiveness, and build affordable homes for Californians.

Furthermore, SB 391 would impose a $75 fee to be paid at the time of the recording of every real estate instrument, paper, or notice. While SB 391 does not apply to sale transactions, the measure is effective anytime a homeowner records a document, such as refinancing, transferring into or out of a trust, liens, or quit-claim deeds.

CAR said it is against SB 391 because it unfairly adds to the cost of recording real estate documents. The trade group said this amendment “holds SB 30 hostage” to the passage of SB 391.

“Families that are forced to make the difficult decision to sell their home as a short sale are already in financial trouble. And that financial trouble may be due to a serious illness and/or loss of employment,” said Don Faught, president of California Association of Realtors. “They simply can’t afford to pay an additional tax on money they’ve never actually received.”

Short sales have become a popular loss mitigation alternative to foreclosure for homeowners underwater on their mortgage. According to Zillow, 13 million homeowners—accounting for 25.4% of all homeowners with a mortgage—were underwater in 1Q13.

Without special protection, federal and state law would view the debt forgiven by a lender in a short sale as income, and, as a result, that “income” would be taxed. Recently, actions have been done on a state and federal level to keep this “phantom” income from being taxed, just not in California.

That is why CAR, along with State Sen. Ron Calderon, D-Montebello, sponsored SB 30. The bill will assist borrowers who relinquish their home through a short sale to not owe any taxes on the difference between the sale price and the loan debt. The exemption will last for one year, Calderon said.

“CAR is an aggressive advocate for affordable housing, but believes it is bad policy to fund affordable housing at the expense of home/property owners who need to record real estate documents,” the California Association of Realtors said in a press release. “The amendment to SB 30 attempts to extort support for the new tax on homeowners in SB 391.”