Calif. lawmakers approve foreclosure tax-relief measure

The bill would waive state taxes on mortgage debt that has been forgiven in a foreclosure or short sale and could affect some 34,000 taxpayers.
By: Patrick McGreevy: latimes.com
Legislature approves tax break for people in foreclosures, short sales.
The measure, which is expected to be signed by Gov. Schwarzenegger, would waive state taxes on mortgage debt that has been forgiven in a foreclosure or short sale.

Thousands of Californians whose homes were foreclosed on or sold at a loss will likely get tax relief under a measure approved Thursday by the state Legislature.

The bill would waive state taxes on mortgage debt that has been forgiven in a foreclosure or short sale. It is expected to affect about 34,000 taxpayers.

Gov. Arnold Schwarzenegger is expected to sign the measure, which would also provide about $60 million in tax credits to green-energy companies, so people can take advantage of it by the April 15 deadline for tax returns.

Californians can already claim the tax breaks on federal returns. "This is a great example of what we can accomplish when we work together to solve problems for Californians," said Schwarzenegger spokesman Aaron McLear. "This bill will protect homeowners from unfair taxes and encourage California solar companies to expand and create jobs."

The short-sale provision would mean about $34 million less in tax revenue for the state over three years, according to the Franchise Tax Board.

Other parts of the measure, SB 401 by Sen. Lois Wolk, D-Davis, would increase penalties and interest payments on some tax bills. Republicans called that a tax increase, and several GOP members of both houses voted against the bill, which was opposed by the Howard Jarvis Taxpayers Assn.

As the real estate market has slumped, many Californians have found themselves owing much more on their mortgages than their homes are worth. Some have walked away, resulting in foreclosure, or asked their lender to approve a short sale, in which a home is sold for less than the debt, some of which is waived.

The amount waived has been considered taxable income under California law; the measure passed Thursday would eliminate that tax when a bank agrees to accept less than what is owed on a home.

The governor vetoed a similar bill last month because it included a provision, since removed, that would have increased penalties against businesses and wealthy individuals who abuse tax credits.

Business groups including the California Chamber of Commerce and Western States Petroleum Assn. complained that the provision would have made businesses reluctant to claim the tax breaks for fear of making a costly error. The businesses also said California's tax penalties were already tougher than those enforced in other states.

Wolk said the penalties would not have applied to honest mistakes.

The "green" state credits are a response to the federal American Recovery and Reinvestment Act, which provides grants to firms for power plants that produce renewable energy.

The federal government does not tax the grant money. Under the bill approved Thursday, California would provide similar relief.