Distressed homeowners no longer need to pay California state income tax on debts forgiven in a short sale, foreclosure, or mortgage loan modification. Introduced into law yesterday, Senate Bill 401 generally aligns California’s tax treatment of mortgage debt relief revenue with federal legislation. Pertaining to debt forgiven on a loan secured by a “qualified principal residence,” individuals will now be exempt from both federal and state income tax penalties. The current federal exemption is for indebtedness up to $2 million, whereas the California State Senete Bill 401 exemption is for indebtedness up to $800,000 and forgiven debt up to $500,000.