California short-sellers may face huge tax bills

March 19, 2010 6:56:39 AM PDT
Californians forced to sell their homes at a loss, to avoid foreclosure, may get hit with a huge tax bill. The governor is threatening to veto a measure designed to forgive a rather strange tax already on the books.

A divorce last year forced Raymond Kay into a short sale where his bank agreed to let him sell his home for less than what he owed on the mortgage. It is an alternative to foreclosure.

"We bought it for $500,000 and when we were forced to do that short sale, we got $360,000. So we lost $140,000 on it," says Kay.

Unlike the federal government, the state of California considers that $140,000 in loan forgiveness a taxable gift from the bank for 2009. Most people in this situation don't have the money.

"It's almost $13,000 for the taxation for us," says Kay.

A proposal on Gov. Arnold Schwarzenegger's desk would bring relief to more than 100,000 former homeowners like Kay, who had forgiven debt through short sales, loan modifications and certain foreclosures, by erasing that tax liability.

California had it in place for 2007 and 2008, but it expired. The governor is set to veto the 2009 version because Democratic leaders inserted an unrelated provision.

"They've tried over the last six years to try to jam me, and it doesn't work. I don't fall for the jam job," says Schwarzenegger.

In a sense, these former homeowners are caught up in a legislative spat. Meanwhile, that April 15 deadline is around the corner.

"There is some political gamesmanship going on," says St. Sen. Ron Calderon, D-Montebello.

Now, a small bi-partisan group of lawmakers is urging immediate passage of a similar bill, but with the controversial provision removed.

"We're talking about shell-shocked Californians who have just lost their homes, their credit has been destroyed along with their dreams," says Calderon.

Kay and other Californians are in financial purgatory, waiting to see what the capitol does before they file their state taxes. Do they owe or don't they?

Many people are also getting hit with unexpected federal taxes, for a similar issue involving banks forgiving credit card debt.


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