The California State Senate unanimously passed a sweeping bill last Thursday that extends a helping hand to taxpayers still reeling from the mortgage crisis.
That measure, Senate Bill 32 (8X), models after federal law a mountain of California state taxation laws, the most significant of which mitigate taxation policies toward financially overburdened homeowners and renewable energy investors. Senator Lois Wolk (D-Davis) authored the bill and hopes to relieve pressure off homeowners troubled with mounting debt.
Current California law transfers the total amount of forgiven debt to the homeowner’s annual income, on which the homeowner must then pay taxes. Inflated income results in higher taxes for the homeowner. Under SB32 (8X), outstanding mortgage debt from foreclosures as well as from “short sales” and loan reductions no longer collects on a homeowner’s income.
“It’s for everyone who’s having a tough time, not just foreclosures,” said bill consultant Colin Grinnell.
Homes are foreclosed when the homeowner “defaults” on the mortgage-meaning he or she can no longer make payments on their loan-and the lender repossesses the property.
In some cases, the lender allows the defaulting homeowner to get out of a mortgage contract by selling the property for less than the principal amount owed on the mortgage. This is called a “short sale.”
The difference between the price of the “short sale” and the price of the home under the original mortgage is the forgiven debt that normally accrues to the homeowner’s income.
In contrast, in a foreclosure the forgiven debt is the total unpaid amount of the mortgage. If SB32 (8X) is realized into state law, the forgiven debt in both situations will simply be cancelled as opposed to being added to a homeowner’s income.
“As many Californians face foreclosure and are forced to walk away from their homes, the last thing they should have to think about is paying taxes on debt they couldn’t repay,” said SB32 (8X) author Senator Lois Wolk in a press release.
The bill applies only to recourse loans, a stipulation that may preclude many indebted Californians from taking advantage of the bill.
The defining feature of a recourse loan is that a lender can take legal action against the borrower if the borrower defaults on a loan. Most of California’s mortgage loans are nonrecourse loans, meaning the most a lender can do is reclaim the property. Nonrecourse loans generally have higher interest rates.
The bill cannot be used to exempt homeowners from debt greater than $500,000.
“You have to have a little bit of a balance,” Grinnell said. “You don’t want to forgive people that have a lot of purchasing power.”
Also included in the bill are provisions that impose more lenient taxation policy on renewable energy producers.
Previously, vanguards of the renewable energy industry would receive dollar-for-dollar tax credits for their green contributions to the energy industry, Grinnell said. These credits, however, came with strings attached: in order to use them, energy producers needed to be profitable.
Profitability is not easy in the nascent industry of renewable energy production, which led Congress to pass the $787 billion American Recovery and Reinvestment Act (ARRA) in February 2009 by President Obama.
Instead of waiting until investors were profitable enough to receive a tax credit, the Federal Reserve allocated a considerable portion of ARRA funds to dole out up-fronts grants to groups that invest in renewable energy technology. With this, legislation officials intend to stimulate growth in the economy’s sustainable energy sector.
Measure SB32 (8X) now awaits the state assembly’s and Gov. Schwarzenegger’s verdicts.
“The governor certainly has no position on the bill as of right now,” said Mike Naple, deputy press secretary of the governor’s office. “[He] likes to wait until a bill is in final form [before commenting].”
YARA ELMJOUIE can be reached at firstname.lastname@example.org.