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Distressed sellers declared not liable for income tax on short sales

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Posted: Friday, December 13, 2013 9:30 am

The California Association of Realtors’ announced it received a letter from the California Franchise Tax Board, obtained by Board of Equalization 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.

Last month, in a letter to California Sen. Barbara Boxer, the Internal Revenue Service 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, CAR 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 CAR 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.”

For more information and copies of both letters please visit our web site at and click on the “For The Consumer” tab in the easy links section of the home page. I know you join us in expressing our thanks, as well as those of our troubled homeowners, to CAR and Sen. Boxer for their leadership on this issue. As always, we will keep you informed and provide additional details as we have them.

Leading the way ... in California real estate for more than 100 years, the California Association or Realtors ( is one of the largest state trade organizations in the United States with 165,000 members. Your local association of realtors, The Lodi Association of Realtors is 92 years old and is one of the oldest and largest associations in our area. We take our duty to the public serious and providing you with up-to-date housing information is our privilege.

Sheri Aguilar is the president of the Lodi Association of Realtors and can be reached at