Those who lose homes may face California tax hit

The San Francisco Chronicle reports:

Californians who lose their homes in a foreclosure, short-sale or deed in lieu of foreclosure this year could be hit with a state income tax on canceled or forgiven debt.

A state law that temporarily exempted many homeowners from this tax at the state level expired at the end of last year. Attempts to revive it have not been successful.

The state law was similar to a federal one that exempts many homeowners from federal tax on canceled mortgage debt. The federal law remains in effect through 2012.

The state-tax hit could be substantial and the rules are complex. People in mortgage trouble should consult a qualified tax professional.