IRS & State offer good news for short sales in Calif.

For release: From The CALIFORNIA ASSOCIATION OF REALTORS® December 4, 2013

IRS and California Franchise Tax Board declare California distressed home sellers not liable for federal or state income tax on short sales

LOS ANGELES (Dec. 4) – The CALIFORNIA ASSOCIATION OF REALTORS®’ (C.A.R.) announced today it received a letter from the California Franchise Tax Board (FTB), obtained by Board of Equalization (BOE) member George Runner, clarifying that California families who have lost their home in a short sale are not subject to state income tax liability on debt forgiveness “phantom income” they never received in a short sale.

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Last month, in IRS_letter to California Sen. Barbara Boxer, the Internal Revenue Service (IRS) recognized that the debt written off in a short sale does not constitute recourse debt under California law, and thus does not create so-called “cancellation of debt” income to the underwater home seller for federal income tax purposes.  Following the IRS’s clarification, C.A.R. sought a similar ruling by the California FTB.  Now with the FTB’s clarification, underwater home sellers also are assured that they are not subject to state income tax liability, rescuing tens of thousands of distressed home sellers from California tax liability for debt written off by lenders in short sales.

“We are pleased with the recent clarifications issued by the IRS and the California Franchise Tax Board, which protect distressed homeowners from debt relief income tax associated with a short sale in California,” said C.A.R. President Kevin Brown.  “We would like to thank Sen. Boxer and BOE member Runner for their leadership in obtaining this guidance from the IRS and FTB.  Distressed California homeowners can now avoid foreclosure or bankruptcy and can opt for a short sale instead, without incurring federal and state tax liability, even after the Mortgage Forgiveness Debt Relief Act of 2007 expires at the end of this year.”

Leading the way…® in California real estate for more than 100 years, the CALIFORNIA ASSOCIATION OF REALTORS® ( is one of the largest state trade organizations in the United States with 165,000 members dedicated to the advancement of professionalism in real estate. C.A.R. is headquartered in Los Angeles.

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Comment by Renee Ciufo, SFR, CNE on March 11, 2014 at 8:31pm

Thanks for finding that, Travis.  You "out googled" me :-)

Comment by Travis Waller, CRS on March 11, 2014 at 8:12pm

Currently, no state, excluding CA, has any type of Mortgage Debt Relief intact. As of two weeks ago, Congress finalized the fiscal cliff and word is that they will eventually retro act the bill from Jan 1, 2014-end of 2015. Says its not a priority of many bills that have to be reinstated. Hopeful to be done sometime in summer. Latest article from DSNews right here.

Comment by Alice Proski on March 11, 2014 at 8:04pm

I would love a clarification on this for Arizona.

Comment by Suzette Kattula on March 11, 2014 at 8:01pm

What abt MI. I have 3 ss listings & just received an offer on 1 of them. Is MI included in the ss forgivness of debt? Until when?


Suzette Kattula

Comment by Renee Ciufo, SFR, CNE on March 11, 2014 at 7:10pm

I believe the IRS ruling pertains to all states.  California had a state-level bill for state taxes which was in question also.

Comment by Travis Waller, CRS on March 11, 2014 at 4:58pm

I concur with Thomas, we need help in NJ!

Comment by Thomas Zdanowicz on March 11, 2014 at 4:26pm

Damn, what about NJ? Come on IRS and US Govt, help us all out


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