California “Short Sale” Sellers Facing DISASTEROUS 2009 Income Tax!
April 5, 2010 by Jim Walberg · 2 Comments
There are tens of thousands of homeowners in California who have sold or are selling their homes for less than is owed on them to the mortgage company. This is called a “Short Sale”. The Federal government has decided not to charge income tax on the amount of the debt that was forgiven because of the Short Sale for many qualifying sellers. ( Speak with your tax adviser to see if you qualify.) California’s Franchise Tax Board was in alignment with the IRS not taxing this forgiven debt as ordinary income for those who qualified. So, for those Sellers who qualified, in 2007 and 2008 California followed the Fed’s position on this debt NOT being taxed as ordinary income. HOWEVER, the California law was NOT extended for 2009! What this means is that California’s Franchise Tax Board will be charging an income tax on this forgiven debt, and tax it as ordinary income! I, Jim Walberg, am not a tax adviser, however, IF THIS TOPIC APPLIES TO YOUR SITUATION CONTACT YOUR TAX ADVISOR TODAY!
A bill was passed by the California legislature two months ago correcting this difference in how the Federal tax is applied to this forgiven debt for those who qualified, compared to how California is now treating this forgiven debt. It was submitted for signature to Gov. Schwarzenegger’s desk, and ALL of those citizens in California that are effected expected him to sign it which would cause both the Feds and California income tax systems to be back in alignment around this topic. Last Thursday Gov. Schwarzenegger VETOED the bill because he opposed some of the bill’s provisions about tax penalties for businesses. This has been a SHOCKER for the California Short Sale residents, the banks, and the real estate industry. The legislature is immediately drafting a separate bill to fix the mortgage debt cancellation issue, and Gov. Schwarzenegger is saying that he will support it. HOWEVER, it is April 5th and all tax filings are to be made by April 15th – ten days from now. The bill is not expected to arrive on Gov. Schwarzenegger’s desk in time.
Here is an example of the impact on these Short Sale homeowners who would fall into the the category of owing California tax on the portion of their Short Sale that was forgiven by their lender. Let’s say they owed their bank $700,000, but they sold their home “short” for $400,000. This would create a $300,000 debt forgiveness from the mortgage holder/bank. If this law is NOT corrected, that $300,000 could be listed as ordinary income in 2009 or 2010 and be taxed at up to 9.55%, depending on the homeowners tax bracket. That would generate a potential tax bill of $28,650!!!
Lynn Freer is the president of Spidell Publishing. Her company publishes tax law information for tax payers. She was quoted this week as saying, “So, those taxpayers are losing their home, their credit is ruined, and they end up owing on the forgiven debt as income they never saw or received. It’s kind of phantom income.” Since it is ten days from April 15th, the deadline for filing taxes, she suggests that these homeowners who are being taxed unfairly may want to file an extension. Please contact your tax adviser today in order to determine if a filing extension is what you should consider! In addition, spread the word that all of us need to contact our California state representatives and let them know to get this discrepancy in the tax fixed immediately.
Let me know your thoughts about this mess. Until next time…your East Bay Realtor remains on duty.
Related posts:
- Some Bank’s Short Sale Polices Seem To Be Falling Short In The East Bay!
- East Bay Real Estate: 2010 Update – Short Sales Replacing REO’s!
- 2010 East Bay Real Estate Update: Challenges Facing $1 Million+ Buyer/Sellers
Filed Under: Blog, Featured Posts, News, Real Estate, Sellers
Tagged: California Short Sale tax, Gov. Schwarzenegger Vetoes short sale bill, Jim Walberg, Spidell Publishing
Jim – very good article.
Provisions of the federal law (please see your tax adviser for help as this applies to you) will cause a phantom income 1099 if the last loan is not a purchase loan, it is not your primary residence and the loan is over $2 million (for a couple, $1 Million for single). This will stop according to the IRS in December 31, 2012. See in Google, “Mortgage Forgiveness Debt Relief Act of 2007″
One way to get around, at least part of the taxable income, is to use the insolvency provisions of the IRS code and the income can be excluded to the extent one is insolvent.
Again, all of this information needs to be reviewed by a tax professional who is an expert in these matters. I do not pretend to be a tax adviser and am only interpreting the law as I and others have read it.
Great feedback on this challenging topic for Sellers participating in Short Sales. I appreciate the work you do for Buyers in the East Bay. Until your next comments…enjoy your week.