Homeowners who received home loan modifications in 2013 could be provided with tax relief should Senator Anthony Cannella’s (R-Ceres) new bill, SB 339, get passed by legislators.
Under current law, those receiving modifications would have to report the amount of debt forgiven by a lender due to a principal reduction as taxable income. With the new legislation, Cannella hopes to provide relief for homeowners who were devastated by the downfall of California’s housing market.
“Our region was at the epicenter of California’s housing market collapse and is still rebounding from the effects,” said Cannella. “SB 339 will ensure that state law conforms to federal law, and families who have had their mortgage restructured will not be penalized.”
Previously, California law provided homeowners who received a principal reduction the same tax relief provided by the federal Mortgage Debt Relief Act of 2007. With the state law expiring in 2013, California homeowners will owe state income tax on the amount of forgiven debt.
According to the California Monitor, which tracks progress on the national mortgage settlement for the California Attorney General’s Office, the state’s three largest servicers provided more than 84,000 Californians principal reductions, forgiving more than $9 billion in mortgage debt from April 2012 through August 2013. Without legislative action, says Cannella, thousands of Californians could easily be elevated into a higher tax bracket for income tax purposes based upon forgiven mortgage debt.
“Taxing those who are trying to make ends meet and stay in their homes makes absolutely no sense,” said Assemblymember Adam Gray (D-Merced) who co-authored the bill. “I am happy to co-author a bipartisan bill which prevents punishing homeowners who are still recovering from the downturn in the housing market.”
For the counties of the 12th Senate District, which includes Stanislaus, Madera and Monterey, the bill would provide tax relief for 3,500 mortgages that have received modifications from the state’s three largest services, reflecting nearly $400 million in principal reductions.