Tax exemption for homeowners in distress goes to governor

The California Senate voted 21-15 today to approve legislation that would prevent homeowners who have had a foreclosure, loan modification or short sale from being required to pay state income taxes on the debt forgiven.

The bill, SB32 (8X), by Sen. Lois Wolk (D-Davis) also makes other changes to the state tax law so it will conform with fedeal income tax law. It now goes to Gov. Schwarzenegger, who has 12 days to sign or veto the measure once it reaches his desk.

If signed by the governor, the law will become immediately effective. It is retroactive to include the 2009 tax year and the exemption on state taxation of forgiven mortgage debt would remain in force through 2012.