Honestly, I am a little surprised more people aren’t talking about this. Short sales in California have been steady for a good part of the last couple years but the one item that seems to stop homeowners from doing anything is the tax consequences on forgiven debt. Under the Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648) taxpayers will not be taxed upon the cancellation of debt when they sell their primary residence through what we know as a short sale.
Californian’s have still been required to pay the taxes on short sales. The idea is that your gain (the amount of the loss the bank takes) is the banks loss. In recent years homeowners in California would receive a 1099 which can be taxed as ordinary income. This could be a fairly significant amount of money.
Now California seems to be following the same Federal guidelines under the existing Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648). I think this is rather large and I’m surprised more news hasn’t been shed on the new California law. Please refer to all the guidelines for the California Mortgage Forgiveness Debt Relief and BE SURE TO SPEAK WITH YOUR TAX PREPARER OR CPA. If your considering a short sale and your home is in California make sure you know all of the implications. You may not fall within the guidelines and it’s important to note that this is only applicable to your primary residence.