Governor Schwartzenegger vetoed SBX8 32 last Thursday, March 25, 2010. The bill included many provisions conforming California tax laws to Federal tax laws, including a limited conformity to an exclusion from taxable income for cancellation of debt for a principal residence. Previous conformity expired on December 31, 2008.
There are more proposals for California relief relating to cancellation of debt for a principal residence pending. According to Spidell Publishing, the maximum qualified principal residence indebtedness will probably be $800,000 ($400,000 for married filing separate returns) and the maximum exclusion will probably be $500,000 ($250,000 for married filing separate returns.)
It is unlikely that California conformity will pass before April 15, 2010. Taxpayers with debt cancellation due to a short sale, foreclosure or loan modification should consider filing for an extension of time to file their 2009 California income tax returns. Remember the time for paying tax is not extended.