The current shortsale legislation in California expired at the end of 2008. That’s the law that says if you sell your home for less than the mortgage and your bank forgives the remainder, you won’t pay tax on the difference.
We have federal legislation in place that prevents the IRS from taxing forgiven debt. That law will continue through 2012. But states enacted their own individual legislation, and in California’s case, it expired on January 1st.
The California legislators did draft and pass legislation to extend the debt forgiveness period, but some extra, unrelated provisions also crept into the bill. Those provisions are apparently enough for Gov. Schwarzenegger to announce he’ll veto the bill (which must otherwise be signed by March 23rd). If that happens, California residents and property owners will need to plan carefully before proceeding.
Hopefully the Legislature will clean up the bill (SBX8 32) so state residents aren’t facing a double whammy of losing their homes and receiving a tax bill on top.