CAr lobbying still hasn’t passed SB 30 – tax relief on debt forgiveness on a principal residence

I have been surprised that SB 30, the California legislation that would give tax relief on debt forgiveness on a principal residence hasn’t been passed for 2013.  Since 2008 if you had debt forgiven by a lender, that forgiveness hasn’t been subjected to both federal and state income tax.  For example, the bank gives you a $100,000 mortgage and you don’t pay it back, the loan is then treated as income.  For 2013 it seems that it was just going to get another rubber stamp approval year.  However as of August 30th it still has been stalled in the California legislature.   CAr has a powerful lobbying branch in both Washington and Sacramento.  In fact, Larry Roberts just recently posted concerning some of their efforts to prevent Fannie and Freddie to lower conforming loan limits.  CAr although very powerful, the tax bill is still not advance out of committee where it still needs to be signed by Governor.  I’m just guessing, but maybe the banks are the reason this bill has been stalled.  See my logic below.

Banks have been 100% successful in preventing cloud inventory from hitting the market.  So successful that it’s barely even discussed in real estate news, but it still exists.  However, it’s still discussed on this blog.  Bankers are very confident and some banks are rejecting short sale approvals or asking the borrower to make up some of the deficiency to obtain the approval for the short sale.   It’s clear the banks no longer fear a flood of homes hitting market and driving down home prices.  The combination of low rates, never ending loan modifications, and government sponsored loans so far has stopped bubble from deflating.

Under these circumstances it makes sense for the banks to want California to tax the debt forgiveness as income.  If the borrower short sales or forecloses then they could be on the hook for State income tax in 2013.  The pressure to avoid this tax might push the borrower to accept a loan modification instead of a short sale or a foreclosure.  Obtaining the loan modification works to the banks advantage because they keep another house in cloud inventory and off the market.

The State of California wins too, since the would be able to collect more tax revenue.  The State is facing a long term liability of over $500 billion and it’s on the lookout for any additional taxes, tax increases, or user fees.   The State is even trying to change Proposition 13 status for non-residential properties, retro-active businesses tax, and expand sales taxes to includes services not just goods.  The University system is even looking for foreign students, so they can charge those students non-resident tuition fees.   The annual budget short fall always makes the news, but the real problem is the long term liabilities.

CAr on the other hand earns money when their agents sell homes.  They want this tax relief to be extended, so borrowers will short sale their homes.  In fact CAr and NAr has been grumbling for years every time the banks sold homes in bulk to large institutional investors or hedge funds by passing going through individual real estate brokers.

It’s possible that CAr’s lobbying efforts can’t compete with the large banks and to some extent the State of California’s desire to increase taxes.  The successful suppression of the cloud inventory means the banks really don’t want short sale homes hitting the market, unless it’s managed in such away to not impact home prices.  The management of cloud inventory is accomplished by the loan modification programs. Since there is no longer a flood of homes hitting the market, bankers can now finally be stern with their short sale approvals. Again this is just speculation, but interesting to that this bill hasn’t past yet.  In a little more than 2 months people start to file taxes and they need to know what is taxable and what is debt tax relief on the California tax forms.