While President Barack Obama is tinkering with his controversial program to bail out underwater homeowners, state lawmakers are letting politics get in the way of relief for struggling California homeowners.
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.
For many homeowners staring at the barrel of foreclosure, a short sale is a popular alternative, because it allows them to sell their homes for less than the balance owed to the bank and take a shorter credit hit than a foreclosure.
But 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.
The governor said he would sign a bill that terminated the language. The legislature is on a one-week break.
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.