The measure, "SB 401," permits most taxpayers to exclude canceled mortgage debt up to $500,000 on their primary residence resulting from a foreclosure, short sale, or loan modification. The limit is $250,000 for married/registered domestic partner individuals filing separately. It applies to debt forgiveness in 2009 through 2012, and mainly brings California into conformity with federal debt relief laws.
If you've already filed your tax return, but believe you qualify based on the new law, you can file a Form 540X (amended individual income tax return), and subtract the amount of debt relief from income. "To expedite processing, write "Mortgage Debt Relief" in red across the top of the amended tax return. Taxpayers must attach a copy of their federal return, including Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), with their state tax return."
More info at taxes.ca.gov
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