Loan Mods Could Get Complicated in California

Even as the federal government prods the mortgage industry to avoid foreclosures through loan modifications and short sales, California may soon let such help become costlier for borrowers. Debt forgiven on a home loan is considered income and normally subject to taxation. In 2007, however, Congress forbade the Internal Revenue Service to tax forgiven mortgage debt through 2012. Also in 2007, California adopted a ban on state taxation of mortgage-balance forgiveness through the following year. But the ban was never extended. In February the state Senate passed a bill that would put forgiven mortgage debt off-limits to state taxation from 2009 to 2012, aligning California with the federal law. But the bill has not passed the Assembly. And Gov. Arnold Schwarzenegger, who is trying to close a $20 billion budget deficit, said he would veto the legislation because of an unrelated provision that would increase penalties for companies that abuse tax credits. If the bill were enacted, homeowners could seek refunds for 2009 taxes already paid. But in the meantime state income tax returns are due April 1 or a penalty will be assessed. The State Franchise Tax Board has indicated a willingness to work with taxpayers to create a payment schedule. However, the state charges interest at a rate of 4%.