Governor Gets What He Wants on Short Sale Tax

By Sajid Farooq
|  Friday, Apr 9, 2010  |  Updated 3:50 PM PDT
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Sighs of Relief in State Senate, Assembly

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California Gov.Arnold Schwarzenegger says he will sign a bill to end the taxing of short sales.

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Sometimes when the governor flexes his aging political muscle he actually wins.

The state Legislature removed a provision that the governor said was preventing him from signing a bill that could help struggling homeowners thousands in taxes.

Last week Gov. Arnold Schwarzenegger vetoed a bill that would give a tax break to people who short-sell their homes instead of losing them to foreclosure. He said he would not sign a bill that included a provision about tax fraud penalties.

The Legislature removed the condition in the updated bill and the governor says he plans to sign it.

California is one of a handful of states that consider "forgiven debt" as taxable income. Federal law currently does not tax short sales.

Schwarzenegger said while he supports the elimination of a forgiven debt tax, the governor opposed language in the bill that would increase penalties for single tax and joint filers who make more than $10 million or $20 million in income who overstate their tax refund amounts.

California conformed with a 2007 federal tax law that did not consider forgiven debt to be taxable income. But the state law was not extended in 2009.

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