CA Tax Relief - SB 1055

[Irish Gal]

FYI -

CA SB 1055 (Senator Michael Machado; District #05) passed the Senate floor on Aug 19, 2008 (short sale 1099's, CA tax liability). It has now been sent to the Governor. My only concern is it addresses short sales completed in 2007 and 2008 only. With the timeframe it is now realistically taking to complete CA short sales, I am hoping it will be extended through 2009.

Also, the CA Franchise Tax Board site states that if a homeowner can prove insolvency post short sale, the CA tax liability may be waiveable. How often this has successfully occurred, or will occur, is the question.

Also, there is a website to monitor proprosed Bills:

Search Bills

Just thought I'd pass it along.

Irish Gal

[Maurice Bedard]

Great post Irish Gal!

I am very interested in finding out more on how all of what is happening, whether it be a loan modification, short sale or foreclosure will affect people in the long term. This law only going until the end of 2008 is short lived in relation to the crisis and the time it will take to work out these loans.

Here is some interesting info I have found on the subject. However, this is with the IRS and not the state.

On the surface, option three would be seem to be the best alternative for a seller. However, the IRS considers any canceled mortgage debt ordinary income. This means that the amount forgiven is taxed at the same rate — somewhere between 15 percent and 30 percent — as the sellers’ salaries. In addition, because the IRS requires the lender to file a 1099-C form stating the amount of the canceled debt, Uncle Sam will have a record of the exact amount of the debt that was canceled. A seller will also receive a copy of the 1099-C to use in filing income taxes. The seller’s home state would also consider the canceled debt as ordinary income.

4 Exceptions to the Rule

The IRS does recognize four situations in which cancellation of debt will not result in tax liability for the seller. A seller may avoid tax liability:

• When the borrower receives a bankruptcy discharge and the deficiency was included in the bankruptcy
• When the borrower is insolvent at the time of the cancellation of the debt. Insolvency would occur when a borrower’s liabilities exceed assets. Note that seller would have to prove this insolvency to the IRS when filing a tax return.
• When the debt was secured by a non recourse loan. Under a non recourse loan, the lender does not have the legal right to collect a deficiency judgment from any assets of the debtor not pledged to secure the loan. While most home mortgages are do not fall into this category, purchase money loans on a person’s residence are non recourse in some states.
• When the tax liability from the cancellation of debt on an investment property can be offset against other business liabilities and expenses. This exception does not apply to properties occupied as a residence by the mortgagor.
  
  In many short sales, a seller would be able to qualify under the first two of these exemptions, especially since it was almost certainly necessary to show financial hardship in order to convince the lender to agree to a short sale. However, it is the seller’s responsibility to notify the IRS why the amount in the 1099-C should not be counted as ordinary income. Otherwise, the IRS will consider the forgiven debt as income and penalize the seller for unpaid taxes.

Online Exclusive: Short Sales: Taxing What Isn't There

[urgent]

Moe,

in regards to the second of your exceptions to the rule .. "insolvency" .. does that meant even after refinancing .. on a non owner-occupied .. this exception still apply for tax exemption ? .. pls advise. thanks.

[Irish Gal]

Hey there short sellers:

CA SB 1055 recently passed: keep in mind it only applies to 2008 but a sponsor of the Bill (Machado) recently said he expects it to be extended into 2009, as needed. (We all know it is expected to get worse in 2009 and beyond.)

I also read that Gov Terminator recently signed this Bill - SB 1055 - but refused to sign some other Bills (allegedly) protecting CA consumers in the future re predatory lenders/brokers, prepay penalties, etc. I have not read the details of those proposed Bills so I decline comment (not sure if Bills actually poorly written and would not in reality protect consumers so that is why he refused to sign or if Gov Terminator is attempting to continue the protection/interests of predatory lenders/brokers into the future).

SB 1055 applies to any CA tax possibly owed re short sales in 2008.

************************************************** **

CURRENT BILL STATUS


MEASURE : S.B. No. 1055
AUTHOR(S) : Machado, Correa, and Oropeza (Principal coauthor:
Assembly Member Niello) (Coauthors: Senators Alquist,
Denham, Steinberg, and Wiggins) (Coauthors: Assembly
Members Aghazarian, Galgiani, Lieu, and Wolk).
TOPIC : Taxation: cancellation of indebtedness: mortgage debt
forgiveness.
+LAST AMENDED DATE : 08/11/2008


TYPE OF BILL :
Inactive
Non-Urgency
Non-Appropriations
Majority Vote Required
Non-State-Mandated Local Program
Fiscal
Tax Levy

LAST HIST. ACT. DATE: 09/25/2008
LAST HIST. ACTION : Chaptered by Secretary of State. Chapter 282,
Statutes of 2008.
COMM. LOCATION : ASM APPROPRIATIONS
COMM. ACTION DATE : 08/07/2008
COMM. ACTION : Do pass as amended.
COMM. VOTE SUMMARY : Ayes: 16 Noes: 00 PASS

TITLE : An act to add Section 17144.5 to the Revenue and
Taxation Code, relating to taxation, to take effect
immediately, tax levy.

************************************************** ****

Just an FYI.

Irish Gal

[elpjohnson]

Thanks for the info, Irish Gal!

[Ambling]

I've been looking around on Google but I've had no luck finding updates on this.

Does anyone know if California will extend SB 1055 into 2009 and beyond?