If you are doing a short sale in California, you may have gotten an extension on tax debt forgiveness. California law, passed in 2011, protects homeowners from lenders attempting to collect additional assets in the case of a short sale. This was in expectation that Mortgage Forgiveness Debt Relief Act, signed by congress in 2007 and renewed in 2008 to expire in 2012, would in fact expire. The Act was extended through 2013, but there is currently no word on whether it will continue past Jan 1, 2014.

U.S. Sen. Barbara Boxer petitioned the Internal Revenue Service in August for California home sellers to remain exempt in accordance with the 2011 state law, and the IRS affirmed that California families who sold their homes in a short sale will not have to pay a tax penalty for debt forgiven even after the federal law banning those penalties expires.

Boxer said: “California homeowners have struggled through years of economic hardships during the Great Recession. I am relieved that these families will not face a burdensome tax penalty just as they are trying to rebuild their lives with a short sale.”

This ruling from the IRS means that Californian home sellers can conduct short sales without fear of a heavy tax burden (the amount forgiven by the bank in a short sale had hitherto been considered income, making a debt forgiveness turn into taxes owed of thousands of dollars.) An average of $60,000 in debt is forgiven in short sale transactions, according to the real estate trade association. This can mean close to $20,000 in tax debt!

In their Oct 22, 2013 report, the California Association of Realtors announced that in September 2012, one out of four transactions involved a short sale. CAR projects there may be as many as 55,000 short sales in California in 2014. Distressed California homeowners will be able to continue avoiding foreclosure or bankruptcy and opt for a short sale without incurring federal tax liability even after the Mortgage Forgiveness Debt Relief Act of 2007 expires at the end of this year.