CBA-sponsored AB 1393 (Perea), a federal tax conformity bill related to mortgage debt that is forgiven by a lender, passed the Assembly late last week and now awaits consideration by the governor for his signature or veto.

This measure allows homeowners to apply for state tax refunds for taxes paid on forgiven mortgage debt for the 2013 tax year. During the past six years, the California Legislature has enacted more than six dozen mortgage and foreclosure related bills. The public policy advanced by California lawmakers has been one that encourages lenders and mortgage servicers to offer foreclosure prevention alternatives to distressed borrowers. It should follow then that the public policy be one that does not punitively impact the very borrowers seeking these solutions. CBA believes that when debt is forgiven by a lender, as part of an agreement with a borrower using the short sale process or a principal reduction within a loan modification, the borrower should not be penalized on their state income taxes. Many borrowers who faced foreclosure last year and successfully negotiated a short sale or loan modification with principal reduction might once again find themselves unable to make their mortgage payment if they are saddled with a tax burden resulting from forgiven debt. For more information on this measure please contact Jason Lane, vice president of government relations at jlane@calbankers.com.