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Presently there is no moritorium on state income taxes for a short sale. Please alert anyone you know who may be considering a short sale that there is no state tax moritorium:
“Revenue and Taxation Code section 17144.5 (as added by SB1055) allows taxpayers to exclude up to $250,000.00 of cancellation of debt [COD] income that results from a short sale on a loan that was used to acquire, construct or substantially improve a principal residence of the taxpayer. The maximum amount of the loan eligible to be excluded is $800,000.00. Unfortunately, this act applies only to discharges occurring between January 1, 2007 and December 31, 2008. A bill was introduced to extend the California exemption to 2013, but it has stalled in the legislature. Another bill proposed by Assemblymen Charles Calderon was passed by the legislature extending the exemption, but it also created a penalty for tax filers for unfounded refunds. The governer vetoed this bill. Accordingly, any short sale that occurs after January 1, 2009, will require the homeowner to pay state income taxes on the debt forgiveness unless a new bill is passed and signed by the governer making debt forgiveness retroactive to January 1, 2009.