Borrowers always have questions about credit.  Attached is a colorful info graphic which gives some great information on how credit works and the impact on the cost of a loan. 



For anyone trying to cope with upside-down real estate, the world has been a struggle of hoping for loan modification, settling for a short sale, and trying to avoid a foreclosure.  While the first worry was the risk of judgment liability for an unpaid loan balance, lurking right behind that was the risk of Debt Forgiveness Tax on any amount of debt that remains unpaid.  The IRS calls this taxable income unless you have an exemption from the tax.

For example, if a borrower owes $400,000 on a home which is now only worth $250,000, the lender must cancel, ie "forgive", the $150,000 balance in order for a short sale to occur.  This even applies in most foreclosures. While lenders can claim this forgiven debt as a deductible business loss and even get government payments and other incentives to do so, the borrower faces a significant tax bill because any loan amount forgiven by the lender is income taxable to the borrower.... unless there is a law protecting them.

Federal Debt Forgiveness Tax Relief  

In 2007 the Federal Government passed the Federal Mortgage Debt Relief Act which enabled many people to avoid the tax resulting from a short sale or foreclosure on their homes. California soon followed suit and matched the Federal exemption. Both the Federal and California Bills were set to expire on December 31, 2012.  However,  last New Year's Eve, Congress extended the Federal law to December 31, 2013. California was expected to do the same but that hasn't happened.  After speaking with several of my connections in the California legislature, here's what's happened and what you can expect next.


Early in the year, AB 42 was introduced in the State Assembly which, if passed, would have extended Debt Forgiveness Tax Relief through December 31, 2013 thus matching the Federal law. This Bill has not gone anywhere and is effectively dead for 2013. Meanwhile, over in the CA Senate, Senator Bill Calderon introduced SB 30 which would have extended CA Debt Forgiveness Tax Relief through December, 2014. This Bill sponsored by the California Association of Realtors moved through Committees and, on June 20th was passed by the Senate with only one vote.  However, there was one major problem with both Bills... neither provided any revenue for the State, only the expense of further lost tax revenue.  As a solution, and to provide a revenue source, SB 30 was "linked" to another Bill, SB 391 by Senator DeSaulnier which would create revenue for the State by imposing a new $75 recording fee on nearly every document recorded. In what many consider a hijacking, this action made SB 30 dependent upon the enactment of SB 391... unless SB 391 passes, SB 30 cannot be enacted even if it passes.

SB 391 has nothing to do with Debt Forgiveness Tax Relief. It's called "The California Homes and Jobs Act of 2013". Senate DeSaulnier wants the money to create an "affordable housing trust fund".  Tax relief advocates as well as county recorders and assessors oppose SB 391 as an improper money grab. While efforts go forward to unlink these two Bills, this political battle has raised increased the likelihood that debt forgiveness tax relief in California is dead for 2013. Currently the linked Bills are languishing in the Assembly Revenue and Taxaton Committee.  We'll be watching closely and will let you know if any changes occur but for now it appears that politics have once again trumped the needs of the citizens of California.


Should we expect better in 2014?

Currently, there is nothing in the works that would revive SB 30 or promote any alternative California debt forgiveness tax relief in 2014 although AB 42 could come-up again and be retroactive. But with our State's ongoing budget crunch, this tax relief issue is likely to just disappear.


Meanwhile back in Washington, the on-going political war over the Budget makes the prospects for any extension of the Federal Act remain equally unlikely.  The only pending legislation at the Federal level is S 1187, authored by Sen. Stabenow  of Michigan and our own Sen. Barbara Boxer.  If passed, this Bill would extend Debt Forgiveness Tax Relief through 2015. But passage is not likely.  According to the author, S 1187 is currently in the Sen. Appropriations Committee and will not make it through the process until after December 31, 2013. Meaning the Federal Mortgage Debt Relief Act will expire the end of this year.  It is possible that this Bill could be re-enacted next year.  If so and if S 1187 is made law, then borrowers will receive relief retroactively.



But I wouldn't hold my breath waiting for that one.  The bottom-line for anyone facing possible debt forgiveness tax is to act now to get their property sold and closed before December 31, 2013.... or prepare to pay the tax.  Also, you should know that both the Federal and California debt forgiveness relief laws represent only one of five possible debt forgiveness avoidance paths.  These laws are just the best known and most publicized paths.

The information presented in this Article is not to be taken as legal advice. Every person's situation is different. If you are facing a legal issue of any kind, get competent legal advice in your State immediately so that you can determine your best options.


(source  BPE Law Group, Sacramento CA) If you or anyone you know are behind in payments and our considering completing a short sale now is the time while you can take advantage of the Debt Forgiveness Act.  The sale must be closed by 12/31/2013, and short sales can take a minimum of 2 months up to 6 months to close escrow.

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