Housing debt may mean bigger tax bill
SACRAMENTO — What should have been a legislative afterthought is threatening to become a financial purgatory for thousands of California taxpayers hit by the housing crisis.
With less than a month until tax filings are due, struggling Californians who received mortgage modifications or lost their homes in short sales or foreclosures last year face the prospect of huge state tax bills. That's because legislation that would prevent their canceled debt from being treated as taxable income is caught in the latest budget spat between Gov. Arnold Schwarzenegger and state lawmakers.
Schwarzenegger, a Republican, said this week that he would veto a tax bill passed by majority Democrats. Among other things, the legislation would have mirrored federal tax relief given to those who had mortgage debt forgiven in 2009. In previous years, the state conformed with federal law.
Business groups have objected to an unrelated provision in the bill dealing with penalties for tax fraud, and that prompted Schwarzenegger's veto threat.
The governor has asked the Legislature to pass a separate bill dealing solely with the mortgage issue so he can sign it before April 15. Democrats, the majority in both houses of the Legislature, appear to be in no hurry.
If no bill is signed in the next month, San Diego resident Kate Dalcour said she and her husband could be on the hook for nearly $16,000 in additional state taxes.
Dalcour's husband bought a condo for $300,000 in 2007. Because of a pay cut, he was forced to sell it in December for $175,000 less than what he owed on it.
"It's awful and kind of scary," said Dalcour, a 29-year-old behavioral therapist. "This is money that California would not expect to get under normal circumstances, and it's not very fair."
The political standoff is unfolding in one of the states hardest hit by the real estate crisis.
In a foreclosure, a bank typically ends up taking the property after the homeowners fail to make payments on their mortgage. A short sale happens when sellers owe more than the house is worth, and the lender is willing to accept less than the mortgage balance to get out of the investment.
Banks may opt for short sales as an alternative to going through the longer foreclosure process and risk having the property sit empty for months.
Congress responded to the growing problem by passing the Mortgage Forgiveness Debt Relief Act of 2007, which prevented homeowners from being liable for their canceled debt. The act prohibits such federal taxes through 2012.
Sad facts
California matched its state tax laws to the federal act in 2007 and 2008. It has not passed an extension for 2009, which has left many short sellers in limbo. California had the nation’s fourth highest foreclosure rate last month, when one in every 195 housing units there received a foreclosure filing, according to RealtyTrac Inc. The Irvine-based foreclosure listings company listed Nevada, Arizona and Florida as the top three states. According to the National Association of Realtors, 24 percent of home sales nationwide in January were foreclosures and 14 percent were short sales.
