Distressed California homeowners who sell their homes via a short sale to avoid foreclosure will not be subjected to state income tax liability on debt forgiveness after the federal law prohibiting such penalties expires at the end of this year.

The Internal Revenue Service recognized in November that the debt written off in a short sale does not constitute recourse debt under California law. Therefore, this does not create so-called cancellation of debt income to the underwater home seller for federal income tax purposes.

Subscribe Now

Authoritative analysis and perspective for every segment of the mortgage industry

30-Day Free Trial

Authoritative analysis and perspective for every segment of the mortgage industry