Capitol Alert: Legislature may give tax relief for underwater mortgages

dwalters@sacbee.comMay 14, 2014 

Keep Your Home California loosened its rules to include those who are just deeply underwater on mortgages.

JOSE LUIS VILLEGAS — jvillegas@sacbee.com

The Legislature may be breaking up a political logjam over tax relief for beleaguered homeowners who receive writeoffs from lenders for their underwater mortgages.

On Wednesday, the Senate Governance and Finance Committee, by a 5-0 vote, approved a newly amended bill, Assembly Bill 1393, to grant a retroactive income tax exemption for the 2013 tax year for home mortgage debt that is written off by lenders.

If the measure, by Assemblyman Henry Perea, D-Fresno, is signed into law, however, homeowners who were hit with state income tax levies on the writeoffs will have to file amended returns to gain the relief.

Moreover, the relief in Perea's bill is less generous than the exemption allowed under federal income tax law. There is an upper limit on the amount of the writeoff that can be exempted from taxes and it doesn't apply to mortgage debt that was incurred for non-housing reasons, such as the purchase of a car on a line of credit.

Complicating the matter further, some homeowners who saw the their mortgages written down by lenders did not report the reductions as income because of an Internal Revenue Service letter to California Sen. Barbara Boxer that concluded that it didn't have to be reported.

Last year, the Senate passed a bill granting tax relief for 2013, extending a previous measure that applied to 2012, but not before Senate leaders inserted an amendment that made its enactment contingent on approval of another bill dealing with low-income housing.

The maneuver was aimed at forcing the California Association of Realtors, which backed the tax relief measure but opposed the other bill, to change its position. The Realtors refused to budge and the stalemate left both measures hanging in the Assembly when the session ended.

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