May 20th, 2010 10:38 AM by Narbik Karamian
Californians may have to pay tax on canceled mortgage debt.
By Sue McAllister
smcallister@mercurynews.com
Under California tax law, Piwowarski owes tens of thousands of dollars in state income tax on the nearly $400,000 in mortgage debt that was "canceled" when he sold his house for less than what he owed. The state considers canceled debt as taxable income in cases like Piwowarski's and for thousands of other Californians who got rid of their homes last year in so-called "short sales."
Since 2007, federal law has seen things differently, in many cases
So an estimated 35,000 California taxpayers may be left owing state tax for 2009 on something the federal government does not consider taxable, according to the state Franchise Tax Board.
Piwowarski is one of them.
"I paid a pretty penny, $765,000, for that house," he said. "Now I have nearly $400,000 in canceled debt sitting out there that ultimately I'm going to be taxed on by California" if the law doesn't change. ''It's kind of like a double whammy."
The Legislature in mid-March approved
a bill that would bring the state into conformity with federal tax law on debt cancellation. But Gov. Arnold Schwarzenegger vetoed it Thursday because he opposed some the bill's provisions about tax penalties for businesses, said his deputy press secretary, Mike Naple.
Legislators are expected to draft a separate bill to fix the mortgage debt cancellation issue, and Schwarzenegger has said he supports that effort, but the timing is uncertain.
Lynn Freer, president of Spidell Publishing, which publishes information about tax laws for tax preparers, said the discrepancy between state and federal law on debt cancellation stands to punish many former homeowners.
"So those taxpayers are losing their houses, their credit is ruined and they end up owing on the forgiveness of debt as income they never saw. It's kind of phantom income," she said.
Freer said she is hopeful legislation will eventually bring the state into line with the federal government on the matter, "but I think it probably won't happen until after April 15," the day federal and state tax returns must be filed.
She said California taxpayers who may owe state tax on canceled debt on their 2009 taxes can buy time by taking an automatic extension on
There were at least 2,144 short sales in Santa Clara County and 703 in San Mateo County in 2009, according to brokerage ZipRealty, which gathered the data from the multiple listing service. More than 6,400 foreclosures occurred in those two counties last year, according to foreclosure information firm ForeclosureRadar.
Piwowarski was forced to short-sell his house when he could no longer afford the payments because his income had dwindled, and he and his wife were separating. If California law doesn't change to mirror the federal rules, he said, he'd have to pay his huge tax bill in installments "for the rest of my life."
"It would financially wreck me," he said.
Contact Sue McAllister at 408-