This is not a short sale. It is a Cancellation of Debt for a second mortgage. Does the state of CA tax this amount? I cannot find anything on CA Franchise Tax Board that clearly helps.
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Nothing related to Federal 1040 Line 21 income on the California Schedule CA includes exclusion of that specific debt cancellation.
Looking further at the more comprehensive CA FTB publication 1001
https://www.ftb.ca.gov/forms/2015/15_1001.pdf
page 13 specifically discusses reporting of cancellation of debt on the disposition of your primary residence.
Nothing related to Federal 1040 Line 21 income on the California Schedule CA includes exclusion of that specific debt cancellation.
Looking further at the more comprehensive CA FTB publication 1001
https://www.ftb.ca.gov/forms/2015/15_1001.pdf
page 13 specifically discusses reporting of cancellation of debt on the disposition of your primary residence.
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