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Calif. Lawmakers Pass Housing-Crisis Tax Relief

The Legislature passed a bill Thursday that could help many homeowners who were hurt by the housing crisis save thousands of dollars in taxes.

The bill would provide relief for homeowners who received mortgage modifications, lost their homes to foreclosure or sold their houses for less than they owed on their mortgages. It would prevent the canceled debt from being treated as taxable income.

Currently, some types of debts that are forgiven can be considered as income and taxed by the government, meaning that homeowners spared from an overwhelming mortgage can face huge tax bills.

Congress addressed the problem with the Mortgage Foregiveness Debt Relief Act of 2007. The recent legislative action conforms California law to that federal tax change, which runs through 2012.

"The mortgage debt tax relief provision in this bill will provide financial shelter for tens of thousands of Californians," said Sen. Ron Calderon, D-Whittier. "It's about time we gave these folks a helping hand. They've lost their homes and they've sat by fretting over a whopping state tax bill they can't afford."

The Assembly and Senate passed the bill after removing a provision about tax fraud penalties that drew objections from Gov. Arnold Schwarzenegger.

A spokesman for Schwarzenegger said the governor will sign the bill.

But some Republicans continued to oppose the legislation because it introduced a variety of tax increases. Assemblyman Ted Gaines said those tax increases would amount to $82 million.

"It's awfully troubling when we're going to provide a benefit to one class of taxpayer and have another class pay for it," said Assemblyman Roger Niello, R-Sacramento.

Associated Press Writer Robin Hindery contributed to this report.