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Question:
APR 05, 2012

Information on 1099 Income From Short Sale

Will IRS provide me any payment plan for the taxes that I owe after the short sale deficiency balance is reported via 1099?

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Bill's Answer: Bills.com Resident Expert

You might avoid paying taxes on the imputed income indicated in the 1099-C as per the "Mortgage Forgiveness Debt Relief Act of 2007 (HR 3648)." Mortgage Debt Relief Act will save some homeowners facing short-sales or foreclosures from paying federal taxes on the “forgiven” debt. There are very specific requirements:

  • The mortgage is for the homeowner's principal residence. The relief does not apply to any debt forgiveness for any vacation or investment home.
  • Forgiveness is only for the “acquisition indebtedness” of the principal residence. Acquisition Indebtedness is defined as the debt used to acquire, construct or rehabilitate the home.
  • No relief is available for cash-out mortgages whether the cash-out takes the form of a refinanced first mortgage, a second mortgage, a home equity line of credit or a similar arrangement. Exception: If the cash-out was specifically used to improve the home and the homeowner has adequate records to prove it.

This bill relieves the specific homeowner of their federal tax liability but does NOT relieve the homeowner of their state income tax liability.

If you have refinanced your mortgage, have a second, a third or if this is an investment property -- you likely do not fall under the protection of this act at all. I strongly suggest that you enlist the counsel of an experienced attorney and for tax implications, get expert advice from an income tax professional (CPA). Ask the tax professional if you are eligible to use the IRS Form 982, so you can refrain from declaring as income any amount listed on a 1099-C you receive for cancellation of debt. You can read more on the FAQ section of the IRS document Home Foreclosure and Debt Cancellation.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

Comments (59)


Scott M.
Calabasas, CA  |  April 05, 2012
Hi Bill, Very helpful article and Q&A's. I purchased my home in 2003. In 2006 I refinanced through another lender and took cash out. In 2010 I got my loan modified. I'm under a decent amount on the home and am seriously considering short selling now to take advantage of this debt relief program; however, will I not qualify based on my refinance in 2006? And who determines whether I qualify or not? The IRS? Thanks
Bills.com
April 05, 2012
A homeowner dealing with the aftermath of a foreclosure or short sale confronts two separate issues. The first is how the lender reacts to the deficiency balance. If the lender pursues the homeowner for the deficiency, the homeowner must devise a strategy for repayment or otherwise resolving the debt.

The second issue is if the lender issues a 1099-C. If so, the homeowner must deal with forgiven debt income. Review the qualifications for the Mortgage Forgiveness Debt Relief Act by following the links you find on this IRS page Mortgage Forgiveness Debt Relief Act and Debt Cancellation.

You mentioned a refinance. According the IRS page I just mentioned, "Debt used to refinance your home qualifies for this exclusion, but only to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified. For more information, including an example, see Publication 4681."

The IRS is the judge and jury when it comes to deciding tax issues. Your state courts decide any actions relating to your lender collecting the deficiency balance.
Chris T.
Charleston, SC  |  April 04, 2012
I am a Realtor in South Carolina. I'm representing a client in a short sale. He did refi in 2006. He did a cash out. He was diagnosed with brain tumor. Will he still have to pay taxes on the difference? or will it be forgiven?
Bills.com
April 04, 2012
Need more information to offer a yes or no answer. The cash-out refinance may be an issue, and how the homeowner used the cash is key. Review the bullet points above, and the instructions in Form 982 and Publication 4681 to determine if the Mortgage Forgiveness Debt Relief Act applies to any forgiveness indicated in a 1099-C issued by the lender.
Lyn B.
Ocala, FL  |  February 20, 2012
How can I do if a 1099C is not send by mortage company in a timely matter before I need to file my taxes?? I had a short sale in Florida.
Bills.com
February 20, 2012
My understanding is that you can file the IRS Form 982 and list the amount of debt forgiven, even if you did not receive a 1099-C. It is a similar situation to a person who works as an independent contractor and does not get a 1099. He or she would file the return and list the income receive and inform the IRS that no 1099 was received. I recommend that you speak with a tax professional to make sure that I am correct. Also speak to the tax professional to see if you are eligible to avoid claiming the forgiven debt as income due to the Mortgage Forgiveness Debt Relief Act.
Jesse B.
Newport News, VA  |  January 17, 2012
I just received military orders to PCS (Permanent Change of Station) to Ft Irwin, California from Fort Eustis, Virginia. I bought a home at 242k back in 2008 and now owe 229k. The house is now being appraised at about 200k. It was a VA (Veteran's Association) Loan. Technically the VA will pay off the loan if I just throw my arms up and just give up. But I believe the VA is a great service and I don't want to assist in damaging the system provided to veterans. However the Army is making me move. I refinanced the home from 6% interest to 4.5% interest and have paid $1,000 to repair the AC system, $1,500 to replace the Privacy Fence. $1,040 to replace a window and removed carpet from the dining room and replaced it with Laminate hardwood. Though I didn't specifically refinance the home to do the upgrades I did do a lot of upgrades. If I end up doing a short sale. Would I qualify for the tax relief on the 29k or so difference? Any information you can provide will be greatly appreciated. I'm stressing the whole situation, because If I don't sale by June I can't pay the note anymore. (I'm current on my note as of right now)
Bills.com
January 18, 2012
You should not have a tax obligation that is tied to a 1099-C that a lender may issue you for forgiven debt, if the home has been your primary residence. The Mortgage Forgiveness Debt Relief Act should protect you from declaring the forgiven debt as income. I advise anyone who is facing what you are facing to speak with a tax professional, to ensure that an authoritative answer is received.

Make sure that you also consider how a short sale will affect your ability to purchase another home, down the road, through a VA loan.
Teresa I.
Aurora, CO  |  November 05, 2011
Hi in 2006 I sold my house in a short sale, I had a first and a second. I went to the closing signed all the doc and moved on. Now 6 yrs later the 2nd mtg co is trying to collect on the 2nd through a collection agency. I filed a 1099 as well and even got money back at closing, is this legal and do i have to pay this.
Bills.com
November 06, 2011
A short sale does not automatically relieve you of any debt that remained after the sale. Consult with a local attorney regarding the statute of limitations and whether you can use the SOL as a defense to avoid paying the debt. Provide the lawyer with all legal and financial documents regarding the short sale, as well as any documents received from the collection agency.

I am not sure to what 1099 you are referring and what funds you got back at closing. Even if you received a 1099 from the bank you may still be responsible for the debt. Consult with a tax professional regarding those issues.
Jonathan H.
Oregon City, OR  |  October 31, 2011
Homeowner used his 2nd mortgage for credit card and auto debt about 5 years ago. Under "The Mortgage Forgiveness Debt Relief Act and Debt Cancellation" since his debt is "reduced through mortgage restructuring" isn't that was a short sale is "mortgage restructuring." If so, it seems like the 1099 income from a 2nd would also be forgiven, am I right?
Bills.com
October 31, 2011
If the forgiven mortgage was used to purchase or substantially improve the property, then it qualifies for the Mortgage Forgiveness and Debt Relief Act. A mortgage used for other purposes does not qualify. See the IRS document IRS Tax Tip 2011-44: Ten Facts for Mortgage Debt Forgiveness to learn more.
Eric R.
August 29, 2011
It the bank issues a 1099 can they still later collect the unpaid balance ? ie if a short sale is completed and the seller is provided a 1099 Does the 1099 act as contract to release from future liability of debt?
Bills.com
August 31, 2011
Eric, your question should be directed to a tax professional or a bankruptcy lawyer, but I will share some thoughts.

I believe the bank has not ceded its ability to collect on the debt, just because a 1099-C was issued. I believe it can try to collect on the debt, but would have to issue a revised or amended 1099-C, before it could do so.
Jennifer R.
Sparks, NV  |  May 24, 2011
We have an investment property in Fla and have a primary residence in NV. I will be going ot of work to have a baby and don't plan to return. If we decide to move into the investment property (lower mortgage) in Fl, will the bank let us do a short sale in NV on our primary residence? Both are underwater but the NV one is $70K under while the FL one is only $30K under (and a lot more affordable). My attorney said they won't do a short sale without a defiency judgement if you own 2 homes and said strategic default may be the best option based on our current income. Do you have an opinion?
Bills.com
May 24, 2011
There are no universal rules for short sales that all mortgage servicers must follow. Your most conservative course of action is to call the mortgage servicer and ask what rules it follows today for short sales. Your lawyer may be accurate for Mortgage Servicer A, but wrong regarding Mortgage Servicer B.
Erin S.
Steilacoom, WA  |  May 14, 2011
How can I estimate how much I will owe when I get me 1099? I am getting through a short sale I owed 375, sold for 270 in short sale. So will it look like 105k in income? Thanks, Does that mean I will owe 30k-ish at tax time?
Bills.com
May 14, 2011
Re-read the original answer above, and be certain to follow the link to the IRS page that discusses the Mortgage Forgiveness Debt Relief Act.
Bryan E.
Huntersville, NC  |  May 04, 2011
Bill, my ex-wife lived in our ex home. According to separation agreement she was to refi but didn't. She instead moved out and rented and tried to do loan mod. She was turned down for mod and is now looking to short sale. Foreclosure proceedings have begun. There is a first and a second. I'm on the first but not the second. My question is multiple, if home sales for more than first but not more than first and second combined is this still considered a short sale? Next question, I'm assuming since I moved out over two years ago even though I'm still stuck on the mortgage loan (I did do quit claim deed) that I wouldn't qualify for deficiency relief. So will I get a 1099 for deficiency for both second and first, or just first since again I'm not listed on second?
Bills.com
May 04, 2011
  1. A short sale is a voluntary sale for less than the balance of all mortgages on the property.
  2. The quitlaim deed is a separate and independent issue from a mortgage or deed of trust. You could quitclaim deed your rights to a property to the Super Bowl MVP but if your name is on the mortgage or deed of trust you still have liability for that loan.
  3. If the lender cancels the debt on your mortgage or deed of trust, then you will be issued a 1099.
  4. You mentioned the second, and that your name is not on that loan. If that is the case, then you have no personal liability for that loan.
  5. You alluded to the Mortgage Forgiveness Debt Relief Act of 2007. I have seem some seemingly trustworthy discussion online where it was said that if a person resided in a property two of the last five years, that person qualified for the Mortgage Forgiveness Debt Relief Act. However, I hasten to add that I cannot find that rule on the IRS Web site. Therefore, consult with a tax attorney to learn more about the act, and what it means to you.

I want to stress one thing in my last point: Consult with a lawyer who can review your situation in detail.

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