"When we bought our home, we bought it for $500,000, and when we were forced to do that short sale, we got $360,000. We lost $140,000," said Kay.
Unlike the federal government, the state of California considers that $140,000 a taxable gift from the bank for 2009. Most people in this situation don't have the money.
"It's almost $13,000 for the taxation for us," said Kay.
A proposal on Governor Arnold Schwarzenegger's desk would bring relief to more than 100,000 former homeowners like Kay, who had forgiven debt through short sales, loan modifications and certain foreclosures, by erasing that tax liability.
California had it in place for 2007 and 2008, but it expired.
The governor is set to veto the 2009 version because Democratic leaders inserted an unrelated provision dealing with business penalties for tax fraud.
"They've tried over the last six years to try to jam me, and it doesn't work. I don't fall for the jam job," said Schwarzenegger.
"In a sense, these former homeowners are caught up in a legislative spat. Meanwhile, that April 15 tax deadline is around the corner.
"There is some political gamesmanship going on," said state Senator Ron Calderon (D-Montebello).
Now, a small bipartisan group of lawmakers is urging immediate passage of a similar bill, but with the controversial provision removed.
"We're talking about shell-shocked Californians who have just lost their homes, their credit has been destroyed, along with their dreams," said Calderon.
Raymond Kay and other Californians are in financial purgatory, waiting to see what the Capitol does before they file their state taxes. Do they owe or don't they?
"My accountant told me he's holding on to a large number of people's taxes because of the same reason, find out if this bill will pass," said Kay.
While people like Kay can file for an extension, the California Franchise Tax Board still mandates estimated taxes to be paid or else a penalty could imposed.