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One State Takes Mortgage Relief a Step Further

short-sale-four [1]

In December, President Obama signed into law the omnibus bill [2] that included a provision allowing homeowners to exclude forgiven mortgage debt from their gross income when filing federal tax returns.

More than a month later, California State Senator Cathleen Galgiani (D-Stockton) has introduced a bill [3] that would extend tax relief on forgiven mortgage debt for homeowners when filing their state income tax returns. Senate Bill 907 would allow California homeowners who have either sold their home in a short sale or received some type of forbearance on their mortgage payments to exclude forgiven or cancelled mortgage debt from their state income tax forms when listing their income. Without legislation, both the California state and federal government would require homeowners to list cancelled mortgage debt as income.

California has been one of the states hardest hit by the housing crisis. In January 2009, distressed residential property sales in the state peaked at 67 percent—meaning REO sales and short sales accounted for approximately two-thirds of all residential home sales in the state during the month, according to data released by CoreLogic on Tuesday. By November 2015, the distressed sales share had fallen to slightly more than 8 percent in California, according to CoreLogic—but the state still ranked fourth in completed foreclosures [4] for the 12-month period ending in November 2015 with 24,000. Not only that, but financial troubles have still persisted in the state. For example, in 2015, more than 80,000 consumers filed for bankruptcy in the state of California—tops among states and more than 24,000 more than second-place Illinois, according to AACER bankruptcy data reported by Epiq Systems [5].

Galgiani’s bill would provide much-needed state income tax relief to borrowers who cannot afford to pay taxes on money which was counted as income but money that they never actually received.

“This is a common-sense measure to avoid additional fiscal burdens on those who are facing financial uncertainty as a result of the economic crisis and often unemployment,” said Galgiani. “Taxpayers who have lost their homes could face an additional income tax liability of thousands of dollars or more.”

The exclusion of forgiven mortgage debt provision for federal income tax that was signed into law by President Obama in December is an extension of the Mortgage Forgiveness Debt Relief Act of 2007 [6], originally signed into law by President George W. Bush. The original act relieved distressed homeowners from having to pay taxes on forgiven mortgage debt for the three calendar years of 2007 through 2009. That tax exemption was extended three more years until the end of 2012 with the Emergency Economic Stabilization Act of 2008 [7], and it was extended until the end of 2013 with the American Taxpayer Relief Act of 2012. In December 2014, president Obama extended the tax exemption for forgiven mortgage debt until the end of 2014. Last month, it was extended until the end of 2017.

“We want to make sure that families who are trying to stay on their feet aren’t kicked while they are down,” said U.S. Rep. Tom Reed (R-New York), sponsor of the standalone proposal included in the omnibus bill. “Many times they have tried to do everything right, but still run up against tough financial times and the Federal government shouldn’t add insult to injury by levying a tax bill that could cost their homes.”