LOS ANGELES — Thanks to partisan political gamesmanship by the Assembly Appropriations Committee, struggling homeowners who sold their homes in a short sale in the past eight months will be further penalized by being forced to pay state income taxes on money they never received, the California association of Realtors recently announced.
Senate Bill 30 conforms California tax law to federal tax law, which already says sellers can’t be taxed on forgiven mortgage debt. SB 30 failed to pass out of the Assembly Appropriations committee on Aug. 30. The vote on the bill was along party lines with Democrats voting “no” and Republicans voting “yes.”
“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 CAR President Don Faught. “These are real families in real financial need 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.”
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 occurring in 2013 is considered taxable state income. The federal government does not charge federal income tax, and neither should the state.
Unfortunately, Senate leadership, in an act of political gamesmanship, linked the enactment of SB 30 to a new tax measure in an effort to extort CAR’s support for that tax measure.