BILL ANALYSIS �
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|SENATE RULES COMMITTEE | SB 30|
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THIRD READING
Bill No: SB 30
Author: Calderon (D), et al.
Amended: 5/28/13
Vote: 21 - Urgency
SENATE GOVERNANCE & FINANCE COMMITTEE : 6-0, 3/13/13
AYES: Wolk, Knight, Beall, DeSaulnier, Emmerson, Liu
NO VOTE RECORDED: Hernandez
SENATE APPROPRIATIONS COMMITTEE : 7-0, 5/23/13
AYES: De Le�n, Walters, Gaines, Hill, Lara, Padilla, Steinberg
SUBJECT : Taxation: cancellation of indebtedness: mortgage
debt forgiveness
SOURCE : California Association of Realtors
California Bankers Association
DIGEST : This bill excludes qualified mortgage debt that is
forgiven by a lender during the 2013 taxable year from
California taxable income, in partial conformity to the federal
Mortgage Forgiveness Debt Relief Act of 2007 (MFDRA).
ANALYSIS : In 2007, Congress enacted the MFDRA, which provides
that taxpayers may also exclude from income qualified principal
residence indebtedness cancelled after January 1, 2007, but
before January 1, 2010.
California first conformed to MFDRA in 2008, and again in 2010,
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for debt discharged on or before December 31, 2012, with the
following differences (SB 1055 (Machado), Chapter 282, Statutes
of 2008, and SB 401 (Wolk), Chapter 14, Statutes of 2010):
Taxpayers may only exclude up to $250,000 single/$500,000
joint of cancelled debt from income.
Taxpayers may only exclude indebtedness on loans up to
$400,000 single/$800,000 joint of qualified principal
residence indebtedness. The taxpayer must first reduce any
amount excluded for state tax purposes by any debt forgiven on
loan amounts above $400,000/$800,000.
This bill extends California's modified conformity to the
Mortgage Debt Forgiveness Relief Act for discharges of qualified
principal residence indebtedness until January 1, 2014.
This bill is contingent upon the enactment of SB 391
(DeSaulnier, 2013). This bill makes findings and declarations
to support its urgency and purpose.
Comments
When a lender cancels a borrower's debt, federal and state law
generally treats the amount of debt cancelled as income taxable
to the borrower. Taxpayers do not include borrowed funds in
income in the year he/she receives loan proceeds because of the
obligation to repay the loan; the taxpayer is financially no
better off because the loan must be repaid. When lenders reduce
the repayable amount, the taxpayer realizes a gain in his/her
financial situation because a portion of the loan proceeds
already received and not previously taxed need not be repaid.
In U.S .v. Kirby Lumber Co., 284 US 1 (1931), the United States
Supreme Court held that a company that had issued $12 million in
bonds and later repurchased some of them at less than their face
amount made a clear gain, clarifying a previous holding in
Bowers v. Kerbaugh Empire Co, 271 U.S. 170 (1926). Congress
subsequently deemed cancelled debt as income, with exceptions
for:
Debts discharged in bankruptcy.
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When the taxpayer is insolvent, debt discharge is excluded up
to the amount of the insolvency, but triggers specified basis
adjustments.
Certain farm debts.
Debt discharge resulting from a non-recourse loan in
foreclosure.
Many Californians have seen the market values of their homes
decline below the amount of debt they incurred to buy it. Some
homeowners have sufficient income, equity, and home value to
refinance. Others cannot refinance, and attempt to sell their
home for less than they are obligated to repay their lender,
which is known as a "short-sale." Instead of a simple
transaction between buyer and seller, a short sale requires a
third party - the seller's lender - to agree to cancel the
borrower's debt in an amount equal to the difference between the
new sales price of the home and the original amount of the debt
issued to the borrower to buy it, plus any additional debt
secured by the property. For example, a lender must cancel
$150,000 in debt for a borrower who purchased a home in 2005 for
$400,000, but wants to short sell it this year for $250,000.
The lender must assess the current housing market, the current
borrower's ability to repay the loan, and federal and state
incentives when considering whether to accept this loss. While
lenders can claim principal forgiven as a deductible business
loss, the borrower faces a significant tax bill in addition to
the loss of any equity in the home at the time of sale because
any loan amount forgiven by the lender is income taxable to the
borrower absent legislation. Additionally, any loan
modification that results in reduced principal may also result
in taxable income for the borrower.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
According to the Senate Appropriations Committee, the Franchise
Tax Board estimates that this bill will result in General Fund
revenue losses of $50 million in 2013-14 and $5 million in
2014-15.
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SUPPORT : (Verified 5/28/13)
California Association of Realtors (co-source)
California Bankers Association (co-source)
Attorney General Kamala Harris
Board of Equalization Chairman Jerome Horton
California Independent Bankers
California Mortgage Bankers Association
California Society of Enrolled Agents
California Taxpayers Association
Center for Responsible Lending
Orange County Association of Realtors
Southwest Riverside County Association of Realtors
ARGUMENTS IN SUPPORT : According to the author, "Families are
stuck in financial limbo. Homeowners currently in short sale
negotiations cannot finalize these transactions without
potentially incurring a tax they already cannot afford. Yet
they do not have the luxury of time to wait to see if the state
will act to provide relief from this tax. SB 30 is the right
thing to do. Families forced to make the difficult decision to
sell their home as a short sale are already in financial
trouble. They simply cannot afford to pay an additional tax on
money they have never actually received."
AGB:d 5/28/13 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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