Central Valley real estate agent Donny Piwowarski last year sold his four-bedroom, 3,500-square-foot house on a half-acre in Tracy for $387,000 — about half of what he paid for it in 2005. Now with tax-filing season here, his situation is getting even grimmer. Under California tax law, Piwowarski owes tens of thousands of dollars in state income tax on the nearly $400,000 in mortgage debt that was “canceled” when he sold his house for less than what he owed. The state considers canceled debt as taxable income in cases like Piwowarski’s and for thousands of other Californians who got rid of their homes last year in so-called “short sales.”

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3d rendering of a row of luxury townhouses along a street

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