The California State Legislature and governor finally came to an agreement on a bill to eliminate state income taxes on home owner debt relief obtained in a short sale. Considering there are just a few days until tax time on April 15th, our representatives in Sacramento cut this one pretty close.

Senate Bill 401 by Sen. Lois Wolk, D-Davis, was passed today by both houses of the legislature. It provides tax relief for mortgage debt forgiveness for tax years 2009 through 2013. Reliable reports are that Governor Schwarzenegger’s has indicated he will sign the legislation.

This is very good news for those in the process of doing a short sale or considering one. The new law now makes Californai tax code consistent with the Debt relief act of 2007 at the Federal level. More information on the federal program , including detailed examples, can be found at in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. Also see IRS news release IR-2008-17.