Home Buying in Highland>Question Details

Jane 3456, Home Buyer in Highland, CA

I went through a Short Sale, the Bank took a Loss, and I was issued a Tax Liability for the Loss. Is This Legal, and Why?

Asked by Jane 3456, Highland, CA Tue Sep 17, 2013

I made an obligation to pay my loan. I breeched, I lost my home, and NOW I just now received a Tax Liability for the Banks Loss .... WHY ?

Help the community by answering this question:


Hi Jane, quick update on SB30:

SB30 has stalled in the Assembly Appropriations Committee and will not make it to the Governors desk this year.

The California Association of REALTORS® reported that since SB 30 is a "two year" bill there is a chance it could make it out of the Appropriations Committee when the Legislature reconvenes in 2014 and be signed into law before the deadline to file 2013 state income taxes.

0 votes Thank Flag Link Fri Sep 20, 2013
Jane, by the way, I love the way you took responsibility in your question.
As another bonus, they recently lowered the FHA waiting time to buy after short sale / foreclosure to 1 year ,instead of 3 (Must prove hardship and meet other basic requirements).

Jory Blake
Web Reference: http://www.JoryBlake.com
0 votes Thank Flag Link Wed Sep 18, 2013
Not only is it legal but it is REQUIRED for the bank to do this, the IRS makes them. Google "homeowner tax relief act" and talk to an accountant. It might not be as bad as you think.

J.R. Thrasher
0 votes Thank Flag Link Wed Sep 18, 2013
Clarify please, you simply received a 1099 or it has been proven that you have a tax liability?
If you have a purchase money loan and you live in California then your getting worked up for nothing.
Please get a hold of a tax person before stressing too hard.

Jory Blake
Web Reference: Http://www.joryblake.com
0 votes Thank Flag Link Tue Sep 17, 2013
Hi Jane,

I'm not a tax lawyer so I will not comment on the legality of what has occurred; however, typically forgiven debt is taxable event under IRS code.

That said, while Federal debt forgiveness for a PRINCIPAL residence has been extended out to January 1st of 2014 by The American Tax Payer Relief Act of 2012, as of the date of this post California has NOT passed a similar extension - even though it has in the past since the "Mortgage Meltdown".

C.A.R. is sponsoring SB 30 to provide relief to distressed homeowners attempting to sell, or have sold, their homes in a “short sale.” For now, under current CA state law, when a lender forgives mortgage debt in a short sale, the seller must pay state income tax on the amount of forgiven debt.

So, there's a 50/50 chance you will not have to pay any debt forgiveness tax; but your future rests in SB30 becoming law.

You can keep track of SB30 here: http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml;…

0 votes Thank Flag Link Tue Sep 17, 2013
Hi Jane 3456,

The State of California will tax the debt forgiven you - at this point in time. The law expired on December 31, 2012 where they didn't as long as certain guidelines were met. You should consult your Tax Accountant (and probably should have before you completed the short sale). Maybe the State of California will reinstate the law before tax time but don't count on that - again, talk to your Tax Accountant. The Federal Government may not tax you on the forgiven debt but again, talk to your Accountant.

Shanna Rogers
SR Realty
0 votes Thank Flag Link Tue Sep 17, 2013
If a Debtor skipped out on a legal obligation, such as a Credit Card, Auto, Furniture, Jewelry, home, equity credit line, lawful judgment or another type of debt or obligation, then the entity that lost all or part of an asset by extending the credit to the borrower or Creditor, then the Debtor has a right to use the loss as a deduction, thus lowering possible taxes due to a governing taxing authority by the Creditor.

Thus, if a Creditor/Lender used the loss as a deduction to lower their tax basis, who would be stuck with the tax revenue not received as a result of the default ? Answer: It should be the Borrower/Debtor.

Question: If a Lender/Creditor earned revenue, should there be a moratorium on "Taxes Due" if deductions are removed from the taxation process ? Can a Business legally deduct or write off a Business Loss ? Would you be upset to find out that Companies did not legally pay taxes ?

If a Borrower/Debtor defaulted on their contractual obligations due to a breech, should there also be a moratorium on taxes due by the Borrower/Debtor if the Lender/Credit is denied a tax deduction ? Should a Homeowner be legally obligated to report a Profit or Loss on the sale of a home ?.

Declaring Income and Expenses on an Income Tax form is a complicated task. It is true, this is a sticky situation, and it is questions like these that should have been asked before the Homeownership obligations were contractually entered into by the Buyer and the Seller.

You should NEVER enter into an agreement if you do not understand what you are doing, or you simply do not have the intent to stick to your agreement.
0 votes Thank Flag Link Tue Sep 17, 2013
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