Capitol Alert

At last minute, Legislature OKs tax relief for underwater mortgages

A North Sacramento home awaits short sale negotiations in 2006
A North Sacramento home awaits short sale negotiations in 2006 Sacramento Bee File

A bill giving state tax relief to California homeowners who received modifications of their underwater mortgages, or engaged in short sales, was revived and enacted in the final moments of the state legislative session Wednesday night.

After passing the Senate, the measure, Senate Bill 907, had been held in the Assembly Appropriations Committee earlier in the month, a non-action that is considered tantamount to death.

However, the bill suddenly popped up and was passed on the Assembly floor very late Wednesday, then sent to Gov. Jerry Brown by the Senate just moments before the midnight deadline for the 2015-16 legislative session to end.

While the federal government has exempted paper income from mortgage modifications and short sales – which mushroomed during and after the Great Recession – from income taxes, the state has only sporadically followed suit.

The Legislature approved a series of state tax exemptions for mortgage deals prior to 2014, but Brown vetoed a measure that would have extended tax relief to 2014 and 2015 income, citing the loss of state revenue.

If signed by Brown – not a certainty – SB 907 will allow tax exemptions for 2014, 2015 and 2016 and affected taxpayers can file modified returns for the first two years. The state would lose an estimated $152 million in income tax revenue.

However, there are also limits on how much “mortgage debt foregiveness” on principal residences may escape taxation – no more than $500,000 on a joint tax return and only on “recourse loans” in which lenders can go after a delinquent borrower’s assets other than the real estate itself.

“More than six million families lost their homes in the housing crisis, and there is much uncertainty with what the federal government will do with mortgage rates in the near future, while the hemorrhaging has slowed, it hasn’t stopped,” Sen. Cathleen Galgiani, D-Manteca, who carried the bill, said in a statement. “This bill is urgently needed as taxpayers will have limited time to amend their tax filings to reflect the changes SB 907 is proposing.”

Galigiani’s district was hit especially hard by the housing market meltdown, and she cited her own underwater mortgage as an example of what her constituents experienced.

“It’s unacceptable that the state would essentially receive a ‘windfall’ in tax dollars on the backs of homeowners who held on and worked with their lending institution in order to avoid foreclosure” said Galgiani. “The federal government has already extended this debt forgiveness and now California needs to follow suit.”

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