The state of California recently passed Assembly Bill 1393 that says there are no state tax consequences if you have a home where the debt was cancelled or forgiven by the lender due to a principal reduction from a loan modification.  Say for example you renegotiated the loan on your house and the lender reduced your principle balance by $50,000, thus making the value closer to the current value of the home.   Now you can afford to make the payments and stay in your home. If this occurred in 2013, and AB 1393 hadn’t passed,  you may have had to include this as income on your state income tax return!   Wouldn’t that be a shock!

In Fresno County, up to 20% of homes with mortgages owe more than they’re worth.  A principle reduction would be helpful both to the owner and to the local real estate market.  Usually there are strings attached such as: 1) the reduction occurs incrementally provided the payments are made on time. 2) the entire reduction takes several years 3) and , if you fail to pay as agreed, the reduction is rescinded.

As these folks receive the principal reductions and their homes go up in value, they can sell and move up to something larger.  As buyer demand increases, the market begins to grow.  Prior to the market collapse, a person’s home was his largest asset.  We’re all looking forward to that again.

see the article:  Calif. Law Covers Lapse in Mortgage Forgiveness Tax Protection