RISMEDIA, Feb. 19, 2008-(MCT)-Homeowners forced to sell their property for less than they paid for it would escape a tax hit under legislation sponsored by state Sen. Michael Machado, D-Linden.
Machado’s bill passed the Senate Revenue and Taxation Committee on Wednesday, the first of several tests for the legislation that if passed could help an estimated 8,300 homeowners in San Joaquin County and other places hit hard by the foreclosure crisis.
The proposal would link California law to a federal statute, which, thanks to congressional action late last year, absolves those who are forgiven money off their mortgage by banks in a so-called “short sale” from paying federal taxes on the forgiven amount.
It had been considered income under the old law.
For example, if a home originally valued at $350,000 sells for $300,000 and the bank forgives the difference, under current California law the owner must pay state taxes on the $50,000 difference.
“The last thing we want to do in this situation is attack someone,” Machado said. “It is an example of what the Legislature can do to mitigate the pain of the mortgage crisis.”
His bill would do so for 2007 and 2008 and would apply retroactively should the bill pass. The federal moratorium on paying the tax would last through 2009.
Machado’s legislation will cost the state treasury about $12 million over the next two fiscal years, and to keep that revenue hit to a minimum, Machado agreed to cap the amount of tax relief per person to $500,000, an amendment suggested by committee leader Jenny Oropeza, D-Long Beach.
That annoyed the Republicans on the committee.
“So maybe if you lose enough money, it is all right to make you pay a tax?” asked Sen. George Runner, R-Lancaster. “You’re still being taxed on money you never had.”
Runner and his colleagues tried unsuccessfully to strip the cap but then voted for the overall bill minutes later.
“It is a step in the right direction, even with the amendment,” said Sen. Dave Codgill, a Modesto Republican whose district includes much of San Joaquin County.
The measure now heads to the full Senate.
Copyright © 2008, The Record, Stockton, Calif.
Distributed by McClatchy-Tribune Information Services.
