By Leslie Berkman
McClatchy-Tribune News
State legislation to protect people who lose their houses in
foreclosure or short sales from a big tax bill passed a significant
hurdle this week, winning Assembly approval. The state Senate was
expected to vote on the proposal Thursday.
By Leslie Berkman
McClatchy-Tribune News
State legislation to protect people who lose their houses in foreclosure or short sales from a big tax bill passed a significant hurdle this week, winning Assembly approval. The state Senate was expected to vote on the proposal Thursday.
Passing the Assembly by a 47-27 vote, the bill authored by Sen. Lois Wolk (D-Davis) would exempt people who did short sales or received loan modifications or lost their houses in foreclosure last year from having to pay state tax on any mortgage debt that was forgiven. Otherwise the forgiven debt would be considered income for the homeowners even though they received no money from the sale of their home.
Both the state and federal government extended a lifeline to homeowners in 2007 when the market was flooded with mortgage failures by temporarily exempting the tax on forgiven debt. However, while the federal exemption continues through 2012, the state’s expired at the end of 2008.
With an April 15 tax deadline approaching, tax accountants say many of their clients are scared and uncertain how they would pay the added tax if the state does not pass legislation.
Brian Winter, a tax preparer at Jackson Hewitt in Riverside said a lot of his clients facing a big state tax bill because of the expiration of the state exemption don’t have jobs or enough money to meet the obligation.
Winter said a person with an annual income of $50,000 and $100,000 of debt cancelled on a house would be “on the hook” for about $8,000 in additional income tax. He said most likely some of his clients would be forced into bankruptcy.
Many people who thought they were exempt from the debt forgiveness tax under both the state and federal law, Hewitt said, were shocked to receive 1099 forms in the mail from their lenders that need to be filed with their tax returns to report the cancelled debt.
As state law now stands not all homeowners who have a foreclosure, short sale or loan modification will take a state tax hit. According to the Senate Revenue and Taxation Committee, for example, debt forgiven on a first mortgage used to buy a house even now is not taxable. That is not true, however, if the original mortgage is refinanced and money taken out to buy a car or for another investment.
Sandi Aplin, a tax accountant in Moreno Valley, said the tax laws pertaining to forgiven debt are very complex and require the attention of a professional tax preparer. She advised that those who have had mortgage debt forgiven should apply for extensions on filing their 2009 state tax returns to give the state government time to take action to help them.
Winter said he recommends that his clients hold off on preparing their state tax returns until the first week in April.
Prospects for the Wolk legislation are clouded by uncertainty whether Gov. Schwarzenegger will sign it. The governor vetoed similar federal conforming legislation in the past because of the attachment of a provision that would establish new tax penalties on individuals and businesses that file unfounded claims for tax refunds.
