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Wednesday, January 29, 2014

Clarification of LA Times Mortgage Debt Forgiveness article

Clarification of LA Times Mortgage Debt Forgiveness articleA recent article in the Los Angeles Times discussing the expiration of the Mortgage Debt Forgiveness Act may have caused some confusion for homeowners and REALTORS®.

The article stated, “Some Californians won’t face higher taxes…because a state law enacted in 2010 shields homeowners from paying taxes on any benefit from a short sale...” This may imply that not all California short sales are exempt from taxes. The article clarifies in subsequent sentences that only those who received a loan modification would be hurt by the expiration of the debt forgiveness law.

Specifically, ALL California homeowners who sold their home in a short sale will not pay taxes on the mortgage deficiency, but those who received a loan modification are not exempt from taxes.

Late last year, in a letter to California Sen. Barbara Boxer, the Internal Revenue Service (IRS) recognized that the debt written off in a short sale does not constitute recourse debt under California law, and thus does not create so-called “cancellation of debt” income to the underwater home seller for federal income tax purposes. Following the IRS’s clarification, C.A.R. sought a similar ruling by the California FTB. Now with the FTB’s clarification, underwater home sellers also are assured that they are not subject to state income tax liability, rescuing tens of thousands of distressed home sellers from California tax liability for debt written off by lenders in short sales.

The IRS guidance is limited to California short sales only.
The IRS guidance did not specifically address other types of real estate transactions such as non-judicial foreclosures and mortgage loan modifications.

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