As reported by LA Times the measure, which is expected to be signed by Gov. Arnold Schwarzenegger, would waive California state taxes on mortgage debt that has been forgiven in a foreclosure or short sale. So far, the amount waived has been considered taxable income under California law. The measure passed Thursday would eliminate that tax when a bank agrees to accept less than what is owed on a home.

Schwarzenegger said “I will sign the measure when it reaches my desk. I want to give homeowners and businesses the relief they need. We want to be helpful in every way we can, so we will sign it.”

This is a big news for thousands of Californians whose homes were foreclosed on or sold at a loss. It also comes as a relief to thousand others who are going through this process and may lose their homes via foreclosure or short sales in the future. In California 1 out of every 195 housing units received a foreclosure filing in February 2010. (source RealtyTrac. See Chart below)

Californians can already claim the tax breaks on federal returns. Lawmakers passed the measure in time for people to take advantage of it by the April 15 deadline for filing tax returns.

With the plunge in the real estate market, many Californians have found themselves owing much more on their mortgages than their homes are worth. First American Core Logic reports that 37% of the homes in California were underwater in Q4 2009. (See chart below)

If you are a distressed homeowner and would like to explore different options available to you, call me at 408.905.6261 or email me at shashank@arcuslending.com.