Brian Joseph, OC Register
April hasn’t been a kind month to Harold Honeywell.
On April 3, 2007, his wife of 18 years died of cancer. Two years later, on the anniversary of her death, he was laid off. And now April 15, Tax Day, threatens to cost Honeywell thousands, because state officials have allowed a common tax exemption to lapse.
Honeywell, 61, is one of thousands of Californians who sold his house at a loss when the payments became too much, a practice commonly known as a short sale.
In June, two months after he was laid off from his job as a construction superintendent, Honeywell decided he could no longer afford the two-bedroom, two-bath home in Rancho Santa Margarita he had bought for about $428,000 in 2003.
So he did the responsible thing and sold it, for $350,000, instead of simply walking away.
With commissions and other fees, Honeywell shows a loss, on paper, of about $112,000, but he wasn’t too worried. You see, a few years back the federal government enacted legislation that eliminated tax liability for mortgage debt forgiveness, and many states, including California, followed with similar bills of their own. Honeywell figured he wouldn’t owe taxes on the $112,000 he lost. He moved to Fort Wayne, Ind., and thought the worst was over.
Then, last week, he started preparing his 2009 taxes and discovered something: California no longer offers tax relief for short sellers. Any mortgage debt a lender forgives when a homeowner sells at a loss is taxed, like income. If you make $50,000 a year and sold your house at a $100,000 loss in 2009, you owe the Golden State taxes on $150,000 in income.
Honeywell is on the hook for more than $8,600 in taxes – all because he sold his house at a loss.
“I’m not one of the big ones (who lost a lot of money),” Honeywell said. “They’re going to be in for a rude awakening.”
Honeywell and thousands of others are in this situation because Gov. Arnold Schwarzenegger and the California Legislature have allowed a state version of the federal exemption to expire and have been arguing over new legislation to reinstate it.
The federal government enacted its version in 2007, which establishes the exemption through 2012. Many states simply enacted the federal exemption as part of their own state laws, but California didn’t.
So the next year, state Sens. Lou Correa, D-Santa Ana, and Mike Machado, D-Linden, sponsored a bill to create an exemption for California.
At the time, Correa’s office said, it wanted the exemption to last until 2011, but others suggested a shorter period, so the final legislation established the exemption for only two years, 2007 and 2008.
When 2009 rolled around and Californians continued short-selling, lawmakers moved to extend the exemption. Correa and state Sen. Ron Calderon, D-Montebello, introduced a bill to extend it to 2013. Assemblyman Roger Niello, R-Sacramento, authored similar legislation. Both stalled in the Legislature.
Then Assemblyman Charles Calderon, D-Whittier, swooped in with an exemption bill of his own, only his included a provision that created a penalty for tax filers who file for unfounded refunds.
The Legislature passed Charles Calderon’s bill, but Schwarzenegger summarily vetoed it because of the penalty provision. Correa, Ron Calderon and Niello have reintroduced legislation, but those bills aren’t going anywhere. The only bill that seems to be moving forward is one by state Sen. Lois Wolk, D-Davis, which includes the same provision that caused Schwarzenegger to veto the last one.
Some Democrats, in other words, are trying to use the predicament of short sellers as leverage to get this tax penalty approved. As the Ventura County Star’s Timm Herdt reported, the governor’s office is prepared to sign a bill like the ones by Correa, Ron Calderon and Niello, which only address the exemption issue. But the Democrats, who control the Legislature, are insisting on only moving forward with those bills that include the tax penalty, which they say is important policy.
Democrats counter that Schwarzenegger is the one who is playing politics, by putting the interests of rich people and businesses over struggling Californians who had to sell their homes at a loss.
It’s a political standoff with people like Honeywell caught in the middle. And the clock is ticking.
Honeywell says he’s going to file his federal taxes now and wait until April 14 to file his state taxes, in the hopes another exemption is enacted. He’s not optimistic, but he figures it’s worth a shot. Obviously, something needs to be done, he said. Hopefully someone in Sacramento will do something about it.
“I hate to say it,” Honeywell said, “but even Stevie Wonder can see the gravity of the situation.”