SB 401 Bill - California Waives State Taxes on Forgiven Mortgage Debt

Recently Gov Schwarzenegger's signed bill SB 401 just days before April 15th tax deadline.

Under this provision much needed tax relief will come to homeowners who have already lost their homes and can't afford to be penalized for thousands of dollars in taxes because Mortgage Company forgave the remainder of their loan.

This legislation will provide those who sold their homes in a short sale to exclude the amount or deficit as taxable income for money still owed to the mortgage company. This will apply to loan modifications as well.

This legislation brings California in line with the already existing federal Mortgage Forgiveness Debt Relief Act 2007, which is in effect through 2012.

Just a side note: there are some exceptions... debt forgiveness on a second home mortgage, investment property, business property or refinance that was used for cash-out equity are excluded.

It is estimated according to the franchise Tax Board the cost to California will be about 34 million in tax revenue over the next 3 years.

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