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SB 1055 was approved 8-0 on Feb. 13 by the Senate Committee on Revenue and Taxation. Machado and Wiggins are both members of the committee.
Under existing law, mortgage debt that is forgiven by a lender is taxable to the borrower as ordinary income (not capital gains) in the year in which the debt is forgiven.
For example, if $50,000 in principal of a $450,000 mortgage is written off by the lender as part of a loan modification or a short sale, the borrower would have to increase his or her adjusted gross income by $50,000 that year. These tax law rules can be a heavy burden for borrowers already having trouble meeting their financial obligations.
The Machado bill will allow a borrower whose lender agrees to forgive some or all of their mortgage debt to exclude that forgiven debt from their income for state income tax purposes. SB 1055 will help borrowers whose lenders agree to a short sale, a short payoff, a loan modification, or a loan refinance in which some or all of the borrower’s original debt obligation is forgiven.
It may also help borrowers who lose their homes to foreclosure, if the borrower refinanced his or her mortgage, and if their lender cannot recover the full amount it is owed on the mortgage debt through the foreclosure sale.
SB 1055 will be effective for debt forgiven in 2007 or 2008, and will only apply to debt forgiven on owner-occupied homes.
“The effects of the home mortgage crisis will continue to be felt for some time,” Wiggins said last Wednesday. “I am glad to support Senator Machado’s badly-needed legislation, which will offer real and immediate relief to qualifying California taxpayers.”
Wiggins represents California’s 2nd Senate District, which includes portions or all of six counties: Humboldt, Lake, Mendocino, Napa, Solano and Sonoma.
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