As attempted short sales proliferate across the capital region, many people are worried about bad things that might happen to them – even if they succeed in selling.
Foremost among worries are nasty state tax bills for forgiven debt. With short sales, banks take less than they are owed to avoid the high costs of foreclosing. And governments typically have taxed that kind of forgiven debt as extra income.
Home Front checked this week into the status of legislation that would get people off that hook. As many know, the federal government already has ordered the IRS not to tax forgiven mortgage debt through the end of 2012.
The state of California did the same last year with Senate Bill 1055. It told the Franchise Tax Board not to tax forgiven mortgage debt through the end of 2008. So what about 2009 and beyond? Two bills to extend the protection through the end of 2012 – Assembly Bill 111 and SB 97 – are parked in Assembly and Senate revenue and tax committees.
Technically, if they don't pass, people who do short sales in 2009 will owe taxes on that forgiven debt on April 15, 2010. But don't fret yet; SB 97, at least, by Sen. Ron Calderon, D-Montebello, provides an out.
Even if passed after April 15, "the bill says there are no penalties or interest imposed for failure to pay," said Eileen Newhall, consultant to the Senate Banking, Finance and Insurance Committee. In other words, if the bill passes after the tax filing deadline there are no tax problems for those who do short sales in 2009. (Again, this is only for people who own and occupy their homes, not for investors.)
There's another out, which also applies to investors, said Linda Hainsworth of Sacramento. She conducts classes on short sale complexities for other real estate agents.
"There's an exemption if you're insolvent," she said. The definition of insolvency is tricky, she added, so advice is best taken from a tax attorney.
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