Historically speaking since the Real Estate Crash of 2006, people who lost their homes to short sales or foreclosures or even did loan modifications, received a 1099 for the forgiven debt. The lenders sent them the 1099 identifying how much debt that was forgiven. The state of California treats the forgiven debt as taxable income and reported on your tax return and subject to income tax.
This could of been devastating to the already millions of distressed home owners. To provide relief, Congress passed the Debt Forgiveness Relief Act of 2007 which provided a tax exemption for personal residences. The Act expired in 2009 and then extended. Most states matched the Feds in approving the relief. Again the Act expired in 2013 and again it was extended to the end of 2014.
To this date there is no relief for 2015. There are 2 bills on the table for tax relief in 2015.
For any home owners who may be facing a future short sale in 2015, it is important to talk with are tax professional to see if they qualify for exemption from this tax because of their hardship and debt status. Some may find out that they will not owe any tax even if the Debt Forgiveness Relief Act of 2007 is not extended again for this year.
Feel free to contact me if you are upside down on your home and can’t afford to make payments on your mortgage. There are other programs that can help you keep your home.
Kathy Dyer Realtor CABRE #01723710
KW Coastal Estates
Carmel Ca. 93923