If enacted, it would align state law with federal law, which has been extended to provide another year of tax relief.
Through “short sales,” lenders agree to let borrowers sell their homes at a price lower than the amount owed on their mortgage. They then forgive the difference between the sales price and the amount owed. Historically, such loan forgiveness has been treated as income for tax purposes.
The federal Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure or short sale of a primary residence up to $2 million, qualifies for the relief.
The state law providing more limited relief than the federal act. It excluded from taxable income up to $500,000 in debt forgiveness.
AB 42 by Assemblyman Henry Perea, D-Fresno, would extend the state law for a year. The Franchise Tax Board estimates its enactment would reduce state tax revenue by $50 million this year.
The bill was presented to the Assembly Committee on Revenue and Taxation on Monday. As it routinely does with measures that would significantly affect state revenue, the panel delayed taking action until the details of next year’s budget projections become clearer.