reduction on their home mortgage with an important state tax break. State income tax law generally defines cancelled debt as a form of income. Without additional legislation to exclude cancelled debt, many Californians are essentially taxed on “phantom income” they never received.Galgiani, who represents one of the hardest hit areas by the mortgage crisis, introduced the measure after hearing from many of her constituents about the enormous tax bills they faced following a short-sale or other debt relief process. One constituent in particular, who “received” $100,000 in debt forgiveness from his lender, is now facing a tax bill of over $11,000.
“Many Californians experienced rapid declines in the market value of their homes in recent years, so much so, that their current home value is less than what they owe on their home loan. Some homeowners have sufficient income, equity, and home value to refinance, but others cannot, and instead attempt to sell their home for less than the remaining balance on their loan, which is known as a ‘short-sale,’” said Senator Galgiani.
Galgiani went on to explain, “For example, if a homeowner purchased a home for $400,000, but it’s only worth $350,000 this year, the homeowner could work with his or her lender to do a short sale. That would entail the homeowner being permitted to sell the home for its current value of $350,000, with the lender agreeing to forgive the difference of $50,000 on the loan. However, under current law, the state treats the forgiven amount in the short sale as INCOME, thus requiring the homeowner to pay taxes on the forgiven $50,000, in this example, even though the homeowner never receives any actual money in the transaction.”
Joining Senator Galgiani today were two community bankers who represented the sponsors of the legislation. Ms. Karen Smith from Central Valley Community Bank as well as Ms. Kellie England from Umpqua Bank attended the news conference.
“This is a common-sense measure to avoid additional fiscal burdens on those who are facing financial uncertainty as a result of the economic crisis. The federal government has already extended this debt forgiveness and now California should follow suit,” Galgiani said. “This bill is urgently needed as taxpayers will have limited time to amend their tax filings to reflect the changes SB 907 is proposing.”
Senate Bill 907 unanimously passed the Senate Governance and Finance Committee on a vote of 7-0 on Wednesday. The bill has received bi-partisan support with Democratic and Republican member co-authorships.
Source: State Senator Galgiani
