Taxes on Forgiven Debt

A bill that would make it possible for California taxpayers to avoid paying taxes on forgiven mortgage debt through a short sale or short payoff recently passed a key senate committee. The measure would help California taxpayers whose lenders have forgiven a portion of their mortgage debt, by allowing them to exclude the forgiven debt from their incomes for state income tax purposes. Under existing state tax law, forgiven debt on mortgages is taxable to the borrower as ordinary income for the year in which the debt is forgiven