I am not an attorney or an accountant and you should speak to one about your particular case. However, in broad terms, homeowners who short sell before 2012 owner occupied properties are generally not taxed on the amount forgiven. That many not be true in all cases, especially if there was a cash out refinance, so check with a professional. As far as Ca. goes, they did not adopt the same exclusion. However, I have heard that if you are insolvent you may get excused from the tax. Since you generally have to be insolvent to get a short sale approved that may apply. You can go to the San Mateo, and possibly Santa Clara County Bar Association and make a half hour appointment with a lawyer for $25. I would highly recomend this.
The biggest potential tax issue would usually arise from your Federal Income Tax. Generally speaking, the feds have given owners in your predicament a temporary reprieve from such taxes under the Mortgage Debt Relief Act of 2007. The act is effective until 2012. You should talk to an attorney to see if you qualify! See the link below for more information. You also should check with California tax authorities to see if you will owe a state tax.
As always, consult your tax professional as the opinions on this forum are just that.
We have a pending Short Sale with 2 loans on it and they sellers have been advised by the CPA that the Forgiven Debt would not be subject to Federal Taxes since the Debt Relief act was extended for 2013. The State of California also does not require taxes on homes purchased prior to 2012.
But as most of the folks have advised you should talk to a CPA or a Real Estate Attorney. Also, you have other resources if you do NOT have access to a CPA or an attorney. Your bank's Loss Mitigation department will advise you to contact a HUD counselor by calling 1-888-995-HOPE. There is also some very good information on HUD's website below on the lenders who participated with the 25 Billion dollar Servicing Settlement. It would be wise for you to make sure if your lender participated in this settlement.
Finally, in 2012, a Consumer Finance Protection agency was created to help consumers and they also have a lot of helpful information for home owners in distress. I have inclued their website address below as well.
Regert to hear about your problem.
Here are 2 blogs that should be helpful, however, you must get in touch with a CPA or a Lawyer
who handles such situations and its very important for your Agent to seek waivers from the bank too
for the discharge of debt.
A lot depends on whether it is a home equity line or purchase money, have you refinanced.
If you need further help do call me.