Most California Short Sales Won’t Owe State or Federal Income Tax for Cancellation of Debt
On December 4, 2013, the Franchise Tax Board issued a letter stating that because short sales are nonrecourse, they are not subject to state income tax that typically come from cancellation of debt. This is very timely information as the 2007 Federal Mortgage Debt Relief Act currently expires at the end of 2013. This decision comes as a result of California Code of Civil Procedure 580e which provides that most short sale sellers of residential property will not owe any deficiency at the end of the short sale.
This decision is in line with the letter issued by the IRS last month stating that the cancellation of debt doesn’t result in income tax because personal liability is forgiven.
Although, short sale sellers may be able to avoid paying tax on cancellation of debt, they still may owe capital gains as a result of the sale. A principal residence has exceptions for a married couple up to $500,000 or $250,000 for single tax payers.
This is truly important information for distressed home owners and may provide some piece of mind as they go through difficult times and decisions.
This information is not intended as either tax or legal advice, and all interested parties should consult their tax or legal representatives for details on their specific situation.