Hat tip to Susie! From the L.A. Times:
The measure, which is expected to be signed by Gov. Arnold Schwarzenegger, would waive state taxes on mortgage debt that has been forgiven in a foreclosure or short sale.
Thousands of Californians whose homes were foreclosed on or sold at a loss would get tax relief under a measure approved Thursday by the state Legislature.
The bill would waive state taxes on mortgage debt that has been forgiven in a foreclosure or short sale. It is expected to affect about 34,000 taxpayers.
Gov. Arnold Schwarzenegger said he would sign the measure, which would also provide about $60 million in tax credits to green-energy companies, when it reached his desk. Californians can already claim the tax breaks on federal returns. Lawmakers passed the measure in time for people to take advantage of it by the April 15 deadline for filing tax returns.
“The mortgage-debt tax relief provision in this bill will provide financial shelter for tens of thousands of Californians who have lost their hopes and dreams in the housing market crash, and it’s about time we gave these folks a helping hand,” said state Sen. Ron Calderon (D-Montebello).
The short-sale provision would mean about $34 million less in tax revenue for the state over three years, according to the Franchise Tax Board.
The “green” credits are a response to the federal American Recovery and Reinvestment Act, which provides grants to firms for power plants that produce renewable energy. The federal government does not tax the grant money. Under the bill approved Thursday, California would provide similar relief.
Other parts of the measure, SB 401 by Sen. Lois Wolk (D-Davis), were called tax increases by Republicans. Even though they supported the tax-relief element, several GOP members of the Senate and Assembly voted against the bill, which was opposed by the Howard Jarvis Taxpayers Assn.
The Republicans objected to a provision that would reduce deductions for charitable gifts, and to changes that would allow the state to tax more income earned by minor dependents.
The changes would also make it harder to qualify a home as a principal residence for purposes of escaping capital gains taxes when the property is sold, and some penalties and interest charges to corporations would be increased, according to Therese M. Twomey, a principal consultant for the Senate Republican Policy Office.
These changes would bring in more than $10 million in new revenue over five years, Twomey said.
“It’s an issue of fairness,” said Sen. George Runner (R-Lancaster). “You are giving money to one group of people and taking it away from another group of people.”
With the plunge in the real estate market, many Californians have found themselves owing much more on their mortgages than their homes are worth. Some have been foreclosed upon or asked their lender to approve a short sale, in which a home is sold for less than the debt, some of which is waived.
The amount waived has been considered taxable income under California law. The measure passed Thursday would eliminate that tax when a bank agrees to accept less than what is owed on a home. The governor vetoed a similar bill last month because it included a provision, since removed, that would have increased penalties against businesses and wealthy individuals who abuse tax credits.