George Runner announced 12/4/13 that the Franchise Tax Board will follow the lead of
the Internal Revenue Service and not impose a tax penalty on Californians who have
sold their home via a short sale.
In a written response sent to Runner today, FTB Chief Counsel Jozel Brunett states,
“Since California conforms to the relevant portions of the federal tax law governing the
forgiveness of nonrecourse and recourse indebtedness, California would follow the
federal treatment for the CCP section 580e transactions.”
“This is welcome news for Californians who have had to short sell their homes this
year,” said Runner. “We learned last month they wouldn’t face a federal tax penalty. We
now know they won’t face a state tax hit either.”
In a September letter to FTB’s Chief Counsel, Runner requested a legal opinion as to
the potential tax consequences for a California resident who completes a short sale
under existing California law.
Initially, FTB staff indicated they would need guidance from the IRS before providing an
answer. That guidance arrived last month in an IRS letter to Senator Barbara Boxer
regarding the expiration of the Mortgage Forgiveness Debt Relief Act. The IRS opined
that debt forgiveness involving non-recourse loans held by California homeowners will
not be viewed as taxable income.
“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 California Association of Realtors
President Kevin Brown. “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.”
A legislative effort to extend tax protection for California short sales derailed this year.
However, the FTB’s announcement that it will conform with the IRS ensures continued
protection for taxpayers without the need for legislation.
Elected in November 2010, George Runner represents more than nine million
Californians as a member of the State Board of Equalization. For more information, visit
www.boe.ca.gov/Runner.