Sacramento-area accountants say rising numbers of taxpayers who did short sales or received loan modifications in 2009 now fear they'll be walloped anew by a cash-starved state government intent on taxing their forgiven debt.
It's impossible to ease the fears or specifically answer many questions, these accountants say.
"We've had quite a few clients fall into that category," said Jennifer Neronde, office manager at Rocklin-based Cramer and Associates CPA.
Uncertainty reigns with less than six weeks before the April 15 filing deadline because the forgiven debt question has gotten caught up in a larger tussle over business taxes between the Legislature and Gov. Arnold Schwarzenegger.
It's headed for a Capitol showdown this week.
Today, the Assembly is scheduled to vote on SB32 X8, a bill by Sen. Lois Wolk, D-Davis, that would ban the state from taxing mortgage debt forgiven in 2009.
But Schwarzenegger is threatening to veto the bill over an obscure clause opposed by business groups. That clause establishes new tax penalties on firms that file unfounded claims for refunds. Business associations believe it will unfairly punish them for tax withholding decisions they claim are difficult to calculate. The clause, along with forgiven mortgage debt, is among dozens in the bill to align California's tax codes with federal codes.
The governor wants the business penalty provisions stripped from the bill, said his spokesman Mike Naple.
"The governor would prefer that the provision be taken out of the bill and addressed in separate legislation," Naple said.
The state gave homeowners who occupied their homes a pass on forgiven mortgage debt in 2007 and 2008. The federal government, meanwhile, has backed off on taxing forgiven mortgage debt through the end of 2012. In the past, both branches of government treated forgiven debt as taxable income.
In a short sale, for instance, a lender might accept a sales price of $200,000 on a home where it's owed $325,000. The $125,000 left unpaid is classified as forgiven debt, which used to qualify as new taxable income. The Bush administration, backed by the real estate industry, blocked the IRS from taxing forgiven debt in 2007. It's a temporary measure to encourage borrowers to call lenders and negotiate alternatives to foreclosure.
In many cases, borrowers try short sales after they fail to get loan modifications, say real estate agents like Larry Henderson, of Prudential Norcal Realty in Carmichael. He said he gets frequent questions about the complicated tax implications of short sales.
"I make it clear to my clients they should talk with a lawyer or a CPA," he said.
--Call The Sacramento Bee's Jim Wasserman, (916) 321-1102 or email him at [email protected]. Read his blog on real estate, Home Front, at www.sacbee.com/blogs.