A recent article in the San Francisco Chronicle reminds us that 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.

The state did agree to follow the federal guidelines of  not taxing the phantom income for 2008, but as far as I know they have yet  to sign a bill to cover 2009.

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.

To read the full story, please click here

You can also read more from the California Franchise Tax Board.