There’s good news for Californians who are needing to do a short sale. According to the California Association of Realtors a letter from one of the FTB board members stating “California families who have lost their home in a short sale are not subject to state income tax liability on debt forgiveness “phantom income” they never received in a short sale.”
So what does this mean for those doing a short sale. Say for example you sell your house for $50,000 less than you owed on your loan. Previously the Franchise Tax Board would tax you on the debt that you’ve been forgiven. In the above case you would add the above loss onto your tax return as taxable income. For this year tax rates range from 1.0% to 12.3%. Thus you could owe the state up to an additional $6150.00 in taxes.
That can be a substantial hit: first you lose your home and now you have to pay taxes for doing a short sale! This is a good thing for those who need to sell.
See full article: IRS and CA Franchise Tax Board clarify mortgage debt