Senate Bill 30 would 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. State Sen. Ron Calderon, D-Montebello, who is sponsoring SB 30, said the exemption will last for one year.
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 federal government does not charge federal income tax, and neither should the state.
SB 30 is currently on the Assembly Appropriations Committee’s “suspense” file. If the committee does not approve the bill today, it could be delayed until January, when homeowners will be subject to pay state taxes.
“CAR is asking that the Appropriations Committee vote ‘yes’ on the bill and for the Legislature to pass the bill before adjournment in September,” the largest state trade association in the U.S. said in a press release. “These sellers are already in financial trouble, and SB 30 is necessary to give sellers relief from an inequitable and unfair situation.”
There are some “critical” reasons why CAR wants SB 30 passed. First, CAR said distressed homeowners are faced with a no-win situation: they could either pay taxes on money they don’t get or let the home go to foreclosure. If they fear state income tax liability on their short sale, they will choose foreclosure instead in order to avoid state tax liability.
However, foreclosures are not good for communities, bad for a homeowner’s credit report, and hurt housing values more than short sales.
Also, CAR added that families deserve to know if they will be taxed. For example, homeowners who are currently in short sale negotiations can’t complete these transactions without potentially incurring state tax liability.
“Sellers who are involved in short sales or contemplating a short sale need to know now that the debt forgiven is not going to be treated as income for state tax purposes,” CAR said.
Another problem hurting the passage of the bill is that it was linked by the committee to another bill that Realtors, as well as the county recorders, assessors and the title industry, oppose, SB 391, an unrelated new recording tax.
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.
“SB 391 does not have the support necessary to pass on its own merits, so they are holding distressed homeowners hostage to promote the tax increase,” CAR stated. “These are real families in real financial need who may well be forced into bankruptcy by an irresponsible legislature.”