PD Editorial: Phantom income, taxes and politics

This artwork by Donna Grethen relates to mortgage defaults.

September 8, 2013, 9:32PM

09/08/2013

The signs of an improving housing market are unmistakable. Foreclosures and short sales accounted for just 14 percent of the home sales in Sonoma County in July, compared to 38 percent a year earlier.

Still, hundreds of local homeowners this year will resort to short sales as a way of getting out from debilitating mortgages. This is particularly true now that the nation's largest lenders, by virtue of the national mortgage settlement reached last year, have agreed to step up loan modifications to help some distressed homeowners. But unless the state Legislature acts soon, these people could face a nasty surprise next year — a tax bill from the state of California for the forgiven debt on their loans.

Under existing law, if a lender agrees to forgive some of a borrower's mortgage debt, that amount is taxed as ordinary income. Since 2008, the state has provided homeowners temporary relief from that tax burden, in conformance with federal tax law. But that relief legislation was allowed to sunset at the end of 2012.

SB 30 by state Sen. Ron Calderon, D-Montebello, seeks to reinstate that tax break for another year. Although the Franchise Tax Board estimates it would cost the state $50 million next year and $5 million in 2014-15, the bill has few opponents. It passed easily in the Senate, but it's being held up in committee in the Assembly because of a restriction — some call it a poison pill — tying the bill's fate to a more controversial piece of legislation, SB 391.

SB 391 by state Sen. Mark DeSaulnier, D-Concord, seeks to begin replenishing the coffers of affordable housing by creating a housing trust account, funded through a $75 document recording fee on real estate transactions. Given imploding government budgets and the undoing of city redevelopment agencies last year, most affordable housing projects in the state have ground to a halt. But with prices rising again while paychecks remain stagnant, the need for low-income housing still exists.

The bill creates a modest fee that has a clear connection to the housing market. But opposition from segments of the real estate industry is holding it up.

We don't like the way these two important bills are intertwined. It's this kind of political brinkmanship that puts so much at risk — think federal debt ceiling battles — and fosters public cynicism.

But that's a battle for another day as, in this case, both of the bills are worthy of approval. One prevents the state from charging struggling Californians a tax on income that they never received. The other sets aside a modest amount to rebuild an affordable housing system that's in shambles.

While legislators need to assure the real estate community that the recording fee will be held in check, such fees are common in other states. Let's not hold the best interests of residents hostage to this kind of politics. Pass them both.