The Federal Debt Forgiveness Relief Act passed in December 2007 enables owner-occupants to avoid the tax on debt that is forgiven by lenders following a short sale, deed in lieu, or foreclosure. The Federal program runs through 2012.  However, California’s similar law ended in 2008 meaning that such debt forgiveness will be taxed in California. You can find out how to claim the exemption for 2008 at http://www.ftb.ca.gov/aboutFTB/newsroom/Mortgage_Debt_Relief_Law.shtml

The real question is whether California will follow the Fed’s lead and extend the relief out till 2012.  However, help may be on the way. In January, 2009, Assemblyman Roger Niello introduced AB 111 which would extend the relief out to December 31, 2012. The bill which was amended on March 5th is now moving its way through the state legislature and is with the Committee on Revenue and Taxation. The next hearing is scheduled for April 13th.  You can track its status at http://www.leginfo.ca.gov/cgi-bin/postquery?bill_number=ab_111&sess=CUR&house=B&author=niello. 

If you have questions about coping with upside down loans or issues of debt forgiveness, you can e-mail Steve at:  sjbeede@bpelaw.com