Following suit with the IRS, who just announced it will no longer tax people for the short sale of homes at full market price, is the state of California. This announcement comes as a major break for those looking to short sale their home and avoid foreclosure.
Potential Effects of the Short Sale Rule
While the short sale tax exemption comes as a relief to many of the underwater homeowners, there is some debate over whether it is the right decision or not. George Runner, Board of Equalization member and one of the major driving forces behind the decision, said “They were going to end up having to declare income for money that was never really there for them. People are now not going to have to pay taxes on phantom income because of a short sale.” The they in this case refers to homeowners facing a future of foreclosure.
There are opponents as well. Peter J. Reilly, a contributor to Forbes.com, wrote: “It may not be good news for everybody…” He went on to outline the difference between recourse and non-recourse debt, explaining that this rule will make almost every California home mortgage non-recourse. He writes, “There are situations where this rule might work against the taxpayer, particularly those who borrowed against property after it appreciated.”
“This is welcome news for Californians who have had to short sell their homes this year,” Runner was quoted as saying. He, like thousands of Californians, is relieved that underwater homeowners will not be hit with additional taxes. “We learned last month they wouldn’t face a federal tax penalty. We now know they won’t face a state tax hit either.”