The good news just keeps continuing.
As we anticipated, C.A.R. received a letter December 4, 2013 from the California Franchise Tax Board (FTB), obtained by the State Board of Equalization, 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.
Distressed San Diego 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.
The IRS guidance is limited to California short sales only. The IRS guidance did not specifically address other types of real estate transactions such as non-judicial foreclosures and mortgage loan modifications.