IRS & California Franchise Tax Board clarify mortgage debt Share

December 4, 2013

The IRS and California Tax Franchise board clarify in a letter to The California Association of Realtors (CAR) that:

 

“California families who have lost their home in a short sale are not subject to state income tax liability on debt forgiveness “phantom income” they never received in a short sale.”

 

 

Now with the Franchise Tax Board clarification, underwater home sellers also are assured that they are not subject to state income tax liability, rescuing tens of thousands of distressed home sellers from California tax liability for debt written off by lenders in short sales. Distressed California homeowners can now feel comfortable and avoid bankruptcy or foreclosure and opt for a short sale without incurring federal and state tax liability, even after the Mortgage Forgiveness Debt Relief Act of 2007 expires at the end of this year.

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