Vermont bill would force lender mediation before foreclosure; many in California on hook for income tax from “short sales”
March 21st, 2010 by Mike HinshawTwo states on opposite coasts also are on opposite sides of the fence in helping economy-jammed homeowners.
With a new bill passing in the state House on March 18, Vermont may be late to the party for many homeowners, but it’s coming off as the voice of reason in comparison to California.
The measure in Vermont proposes that lenders must meet in mediation with affected homeowners before foreclosure can proceed. You can easily appreciate this proposal if you’re one of the millions whose family, friends or neighbors has spent untold hours trying to get a straight answer–or even speak with the same person, two months in a row–from mortgage lenders or loan servicers. Isn’t it almost as if their organizations were designed to cause confusion, rather than alleviate it?
Of course, it’s one thing to deal with predatory lenders tied into Wall Street arrangements. But it’s quite another to have your state government leave you hanging out to dry, and that’s whats happening in California, at least until the Governator gets squared away with a wayward clause or three.
U.S. Congress addressed the issue in 2007
The issue on left coast concerns what is known as “short sales” of homes and the result such a sale has on the seller’s income tax. Traditionally, when a lender OK’d a short sale , the IRS (or the state, if it has an income tax) would consider the forgiven amount as income. Apparently, the reasoning there is that “you got away with something” so we have to tax it. However, what in retrospect seems like a lightning-quick response, the U.S. Congress moved in 2007 to redress that wrong.
And California addressed its own state situation, but then the coverage ran out. For a snapshot, here’s the opening grafs from a March 15 San Francisco Chronicle report:
“Tara Blackwell and her husband sold their Fairfield house in December for about half of its original $825,000 price as a short sale, in which the bank agrees to accept less than is owed on the mortgage.
“The couple and their two children moved in with Blackwell’s parents and thought the situation was behind them. Then it came time to pay their 2009 taxes.
“To their dismay, they discovered that California would count the $412,000 difference between their original price and the sale price as part of their income, resulting in a hefty state income tax bill.
” ‘We lost our down payment of $70,000, we lost our home and now California wants $38,000 (in extra taxes) from us,’ Tara Blackwell said. ‘It’s like kicking you when you’re down.’ ”
Apparently, it all boils down to a head-butting contest between the governor and the state legislature.
Californians were protected until 2009
From an account at huliq.com: “In California, however, the laws on mortgage debt relief fall under state provision. Debt forgiveness occurring on or after January 01, 2009, no longer conforms to federal provision as non-taxable. Instead, the amount of debt released is considered taxable to the state of California.
“The state treats home loans as non-recourse debt, that is, if the home is foreclosed upon, the homeowner is seen as having sold the home for the amount of outstanding debt. Whatever the difference in the mortgage debt and the homeowner’s basis in the house counts as the gain or loss in actual sale.
“If there is a ‘profit’ from the foreclosure, and the property is the principal residence for at least two of the past five years, than the gain may be eligible for gain exclusion on the sale. Conversely, if there is a loss, it may not be taken because it is a person’s primary residence.
“The issue is a pressing one for Californians. Because the debt remaining on a short sale or foreclosure is taxable to the state, many Californians are faced with huge tax bills on top of losing their homes. Currently, Governor Schwarzenegger has threatened to veto the tax forgiveness bill because of a provision in the bill relating to tax fraud penalties for businesses.
“Schwarzenegger wants that provision to be excluded from the bill or wants a separate bill drafted altogether which deals exclusively with the mortgage legislation. Democrats, however are dragging their feet on the issue.”
Diana Olick, in a March 16 “Realty Check,” mentions that California has the nation’s highest foreclosure rate ( “. . . 68,562 properties received a foreclosure filing in February alone . . .”) ends her piece on an alarming note: “The government’s short sale program is designed specifically to lower the number of foreclosures by getting these homes sold quickly to financially able buyers.
“Oh, and remember the $1.5 billion that the Feds also just gave to the five hardest hit states (that would be CA) to do stuff including principal write-down on loans?
“If all these troubled borrowers are going to be hit with a massive tax bill after the fact, then guess what?
“They’re not going to do it.
“Foreclosure city!”
Experts advise filing for tax extension
Californians on the hook have to wait a few more days, until March 23, the deadline for Schwarzenegger to sign the bill.
The Chronicle’s post says, “Several other pending bills would align the state with federal tax law, and Schwarzenegger has indicated that he would sign a bill that focuses only on this issue,” and that, in the meantime, tax “experts advise people who lost their homes in 2009 to file for an extension in hopes that California will rectify matters.”
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