California bill exempts foreclosed homeowners from taxes on forgiven debt

Tax relief is on the way for thousands of fearful California mortgage borrowers. Most no longer face a double whammy of losing their homes — and then paying a big state tax bill on the forgiven debt.

State lawmakers Thursday passed SB 401, a bill by Sen. Lois Wolk, D-Davis, to exempt borrowers who lost homes to foreclosure or short sales in 2009 from state taxes that can run into thousands of dollars. The same is true for certain types of loan modifications.

State tax officials say 100,000 people statewide will be spared paying tax they otherwise would owe.

A spokesman for Gov. Arnold Schwarzenegger said he will sign the bill.

SB 401 aligns much of California's tax code with that used by the Internal Revenue Service nationally. The U.S. government has banned the IRS from taxing forgiven mortgage debt as extra household income from 2007 through the end of 2012. California did the same for the 2007 and 2008 tax years.

The bill extends the state ban from 2009 through the end of 2012. It also bans state taxes on federal stimulus grants for renewable energy projects.

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