Upcoming Foreclosures

If i short sell my house, will the state of California consider the differance income and tax me on it?

I understand there are a lot of foreclosures and short sales going on these days. Is California considering the forgiven amount to be income for the sellers? please point me in the right direction so I can do som addl research as well. Thanks! loan amount is about $270k, it would probably sell for around $200K. Purchased about 1 and a half years ago in Bakersfield. Ouch.

Public Comments

1. Yes, CA wants their income tax and will be agressive about getting it. You may or may not have to pay the IRS too, it depends on your loan history.
2. The answer is you will not owe any taxes if you short sale your home. The question is can you do a one and who is your bank. In almost all cases it's better to do a short sale and not let the house foreclose If you want to make sure just go to IRS.gov and look up foreclosures, the debt relief act is set to expire in 2012.
3. You may owe income tax if the loan balance is more than you paid for the house plus the cost of improvements. If the loan is the one you used to purchase the home, this will not be a problem.
4. Yes BUT it depends on your tax basis if you actually have to pay. If you purchased the home for $400K and sold for $200K, you will receive a 1099 for the difference. But because the original tax basis is MORE than what you sold the home for, you are not responsible for any tax. If you purchased the home for $400K and sold for $500K, you will have a profit of $100K and be responsible for taxes on this amount.
5. Some states do make you claim the short sale amount as income. The Federal government does not, The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief. This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition. More information, including detailed examples can be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. Also see IRS news release IR-2008-17. You need to talk to your accountant.