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Peter, I have a question for you (and any others who would like to chime in) about the new law exempting short sale or foreclosure 1099 income from being taxable.

Just for the record, I believe you're talking about the Mortgage Forgiveness Debt Relief Act of 2007. Not all short sales or foreclosures will qualify for this relief. The discharge of debt has to happen between 1/1/07 and 12/31/09. Only $2MM of acquisition indebtedness will qualify. And it must be on a principal residence.

I have heard that California law supercedes the new federal law and the anyone in California who realizes 1099 "income" due to forgiven debt will, in fact, have to pay the income taxes on it. Can anyone comment on this? .

It's not that California law supercedes Federal law. But California, like most states, has it's own set of income tax rules. They're loosely based on the federal rules, but not always.

In this case, California does not conform to the MFDRA of 2007. So for California purposes, the debt forgiveness is still taxable. Unless, of course, the debt falls into one of the existing forms of relief - bankruptcy or insolvency being the two main forms of relief.

Please assume we are talking about a non-recourse loan, for hypothetical purposes. And that the home was a primary residence for at least the past 2 years, and that it was purchased for 100% financing and is now $150,000 upside down on value vs. amount owed.

The only important assumption here is that the home was a primary residence.

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