11/25/13 – For Homeowners doing short sales, where what you sell your house for is less that what you owe, there has been a taxable issue with the State of California and the Federal government. Previous to 2007 the forgiveness of the debt has been a taxable item on your tax return. For example: you sell your house for $200,000 but you owed $300,000 and the lender forgives the $100,000 difference. You would generally have to include the $100,000 as income on your tax return! That could hurt indeed.
In 2007 The Mortgagee Forgiveness Debt Relief Act , a Federal Law, protected homeowners from from this tax liability; this law is soon to expire at the end of 2013.
The Good News: California has it’s own anti deficiency laws (CCP 580) which protects California homeowners from being liable for the difference in a short sale. Thus, again you’re protected from tax liability in California. So, though you’re still protected under California law, the Federal law is soon to expire! So what’s next?
More Good News: In a Sept. 19, 2013, letter to Sen. Barbara Boxer, D-Calif., that has only recently been made public, the IRS says that “if a property owner cannot be held personally liable for the difference between the loan balance and the sales price … the owner would not treat the canceled debt as income.”
The IRS concluded that because of Section 580e, a California homeowner who goes though a short sale will not have cancellation of indebtedness income.
I’m not a tax lawyer or CPA, please consult with a tax professional to see how your specific situation fits with these laws.
See the Article: “Good new for California homeowners facing short sales”