Posted On: March 18, 2010

California Short-sellers may face huge 2009 Tax

California homeowners beware: if you short-sold your home in 2009 (e.g. during your divorce) and received less for the home than what you owed the bank, you may be faced with a huge California state tax bill, according to KGO TV-7 in San Francisco.

taxes.jpgMany of my divorce clients in the past two years have unfortunately found themselves in the position of losing their family home. In better economic times, the worst scenario usually involved selling the house and dividing whatever sales proceeds were earned. Nowadays, when neither party can afford the home any longer given the financial realities of divorce, and when the home is underwater, or worth less than what is owed on it, there are few options. Foreclosure is one of them, and short-selling is another.

In most cases, if a homeowner short-sells his/her house and the bank forgives the remaining debt, the homeowner is given relief under federal tax law. In other words, the IRS gives them a break. [Note: keep in mind that there are exceptions, and you should consult a tax attorney or an EA (enrolled agent) to investigate your own particular tax situation.] However, California has its own set of tax laws – some of them bizarre, others not so much. In 2007 and 2008, California homeowners were given the same state tax relief as provided under federal law, but this law has since expired.

A new bill has been sent to Gov. Schwartzenegger's desk extending the law into 2009, but the "Governator" has threatened to veto this bill because legislative leaders inserted an unrelated provision into the bill in an attempt to force the governor's hand. The legislature is now considering replacing the bill with another version that does not include the unrelated provision.

If the legislature and governor cannot resolve this dispute, then the debt which was forgiven by the homeowner's bank will be treated as taxable income under California law, even though it likely will remain tax free under federal law. This may cause a huge and unexpected tax burden for those homeowners, who should monitor the situation closely and plan accordingly.

For more information about California family law and divorce issues, please contact attorney Gary D. Sparks at (925) 465-2500 or (707) 398-6008. Or, send a contact request directly from the californiadivorcelawyerblog.com page you are currently viewing.

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