Well the state of California has decided to reinstate tax forgiveness measures so they are more in line with the federal tax forgiveness instituted by the President George Bush. For those unfortunate enough to have to lose their home in a Short sale, it used to be a great shock to walk away from the home to only find out the nightmare has not ended.
Before George Bush signed into law the debt forgiveness act, any amount “forgiven” by the banks in a loan mod or a Short Sale was considered income to the person forgiven and thus taxed as ordinary income. That means if the home sold for $150,000.00 less than you owed, you got hit by the IRS AND the state tax board for personal income taxes, and many people received penalties for not reporting it as income. Many people simply thought they would walk away and that would be it, well, it wasn’t.
Let me explain in simple terms what happened. If your friend gives you $200.00 and you spent the money, but later you cannot pay him/her back, and they are nice enough to get what they can from you and forgive the rest, say like taking only $125.00 instead of $200.00, then the Tax Gods deem that you have been enriched by $75.00 and that is considered income and must be included in all your gross wages as well. The TAX MAN NEVER goes away! The Bank loan on your house is the same way, if you owed $350,000.00 on the first and $50,000.00 on the second and you could not get a loan mod (or wish not to take one) and the home was put up for sale (by a FINE Firm such as The Carrigan Group….I’m just saying), and the bottom line proceeds came only to $135,000.00 to the first and $5,000.00 to the second loan, the IRS and the state tax Board sees you being “enriched” by $260,000.00, and you are taxed on that as income ADDED to your regular income. Scary, very scary, isn’t it?
Well, that was reality for a lot of people, then President Bush decided that it was not fair and with Bipartisan support removed that penalty for people. This year the state and federal tax relief expired, and many sides did not want to reinstate it, The State of California did NOT want to reinstate it because they are desperate for the revenues. Congress reinstated it and finally after many months of delay the Governator decided to retroactively reinstate it. This is a good thing in the short run, hopefully loan amounts and values will not deviate as much in the future and we will not need to reinstate it again.
Here are the specifics, For debt forgiven on a loan secured by a "qualified principal residence," borrowers will now be exempt from both federal and state income tax consequences. The existing federal exemption is for indebtedness up to $2 million, whereas the new California exemption is for indebtedness up to $800,000 and forgiven debt up to $500,000.
"Qualified principal residence" indebtedness is defined as debt incurred in acquiring, constructing, or substantially improving a principal residence. It includes both first and second trust deeds. It also includes a refinance loan to the extent the funds were used to payoff a previous loan that would have qualified.
The tax breaks apply to debts discharged from 2009 through 2012. Californians who have already filed their 2009 tax returns may claim the exemption by filing a Form 540X amendment.
Taxpayers who do not qualify for the above exemptions (e.g., second home or rental property) may nevertheless be exempt under other provisions. Most notably, taxpayers who are bankrupt are exempt from debt relief income tax. Also, taxpayers who are insolvent are exempt from debt relief income tax to the extent their current liabilities exceed current assets. Thank you to CAR Real legal for the information and research on this subject.
For you loyal readers, normally I rant and rave when the government does something wrong, here I am saying this is a good thing and will help a lot of people. Now if they can just get the banks to cooperate and let this inventory get sold to new home owners, we may see a rebound in the market. Well this was just a short one, thanks for reading and, that was just my 8 cents…..
Ryan
I'll have to forward this on to my mom. She short saled her house and paid big in taxes. I don't remember if she sold her house in 2008 or 2009, she did put it up for sale in 2008 but I can't remember how long it took to sale. People always complain that the government is just out to hurt them but then they do help, even if it is just once in awhile.
Posted by: Ami Sylvester | June 08, 2010 at 08:11 AM
wow, i would have never know any of this information! thank you! it sounds like as you said, finally something good! coming for the state!
Posted by: Jacqueline Smith | April 15, 2010 at 09:26 PM