Because of a bill vetoed last week by Gov. Arnold Schwarzenegger, California homeowners who sell short will have to pay taxes on forgiven mortgage debt.
The bill would have prevented California homeowners who sold their homes via short sales or received loan modifications in 2009 from being taxed on the forgiven mortgage debt.
The California Association of Realtors is in support of two stand-alone measures, AB 1779 and SB 14, which would fully conform to the federal rule extending "phantom" income debt forgiveness through Dec. 31, 2012.
Gov. Schwarzenegger vetoed the bill because it contained a provision on tax refunds for the state’s largest businesses.
The part of the bill that would help homeowners follows the Mortgage Debt Relief Act of 2007 that allows taxpayers to exclude income from the discharge of debt on their principal residence.
According to the IRS Web site, debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
The governor has stated that he is in support of banning taxation of forgiven mortgage debt and immediately called for the Legislature to send him a bill to provide tax forgiveness prior to the April 15 tax-filing deadline.
Last year, the Home Affordable Modification Program, or HAMP, was rolled out to help keep people in their homes. But most who applied for the program didn’t qualify.
So the Treasury Department introduced the Home Affordable Foreclosure Alternatives, or HAFA program, as an alternative for homeowners who can’t stay in their homes through the older program.
The HAFA program launches April 5 and ends Dec. 31, 2012.
HAFA provides additional options to avoid foreclosures and offers incentives to borrowers, servicers and investors who utilize a short sale or deed-in-lieu to avoid foreclosures.
Timothy Brown, a Realtor with CPS Properties in Santa Rosa, said the HAMP probably won't help many people in the North Bay.
“Now, for so many people that were going to go delinquent we will have another stop in the process, and it will stretch it out over many more years, but for those who need to sell it will normalize the market,” he said.
In a short sale, the servicer allows the borrower to list and sell the mortgaged property with the understanding that the net proceeds from the sale may be less than the total amount due on the first mortgage.
The $75 billion Home Affordable Foreclosure Alternatives hopes to give up to 5 million homeowners with loans owned or guaranteed by Fannie Mae or Freddie Mac an opportunity to refinance into more affordable monthly payments.
Under the new rules, banks will seek a "Broker Price Option" before the property is listed for sale and let the sellers know a minimum offer they are willing to accept for the home. If the sellers can bring in a buyer with a legitimate offer, the lender must accept the offer within 10 days.
First American CoreLogic estimates that a homeowner in the United States that is underwater will not find relief until at least 2015.