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Press Release from C.A.R:

"Forgiveness Debt Relief Act, which will for one more year exempt the taxation of mortgage debt that is forgiven when homeowners and their mortgage lenders negotiate a short sale or loan modification (including any principal reduction).

However, the California exemption expired at the end of 2012, so forgiven mortgage debt is considered taxable state income for now.  A C.A.R.-sponsored bill, SB 30 (Calderon, D-Montebello), passed out of the Senate Governance & Finance Committee this week by a 6-to-0 vote. 

C.A.R. applauds the committee for approving SB 30 with no dissenting votes, and hopes the Legislature will send this measure to Gov. Brown for his signature into law as soon as possible.  Homeowners who are considering a short sale are uncertain how to proceed because California hasn’t extended the debt forgiveness protections."