No California tax penalty on short sales

Posted by BoNhia Lee on December 5, 2013 

Distressed California homeowners can breathe a sigh of relief.

Those who decide to short sale their home — or sell it for less than is owed to the lender — don’t have to pay state tax on the mortgage debt.

In January, Congress extended the federal Mortgage Forgiveness Debt Relief Act of 2007 giving thousands of homeowners a break on having to pay taxes on the forgiven debt for a year. But California chose not to continue its state tax relief program.

Real estate organizations and state leaders have tried for months to get the program reinstated.

This week, the state Franchise Tax Board followed the Internal Revenue Service’s footsteps in declaring that homeowners are not responsible for paying the state tax.

“We are pleased with the recent clarifications issued by the IRS and the California Franchise Tax Board, which protect distressed homeowners from debt relief income tax associated with a short sale in California,” said Kevin Brown, president of the California Association of Realtors.

“Distressed California homeowners can now avoid foreclosure or bankruptcy and can opt for a short sale instead, without incurring federal and state tax liability.”

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