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Information on 1099 Income From Short Sale - The Bills.com Blog
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Information on 1099 Income From Short Sale
Monday, Oct 20, 2008
Question: I am going through the short sale process with lender agreeing for short sale. Lender says that the deficiency balance on mortgage and home equity loan will be reported to IRS via 1099 form. At this time I am looking at 80000 deficiency balance. If I agree to this and go for short sale, Can the bank still come after me for the balance after reporting to IRS on 1099. Since I am going through this process as I cannot afford to make payments, Will IRS provide me any payment plan for the taxes that I owe after the deficiency balance is reported via 1099? Are there any other things that I should talk to the banker before signing the purchase agreement offered by the buyer in this short sale proceeding? I really appreciate your answers to these two questions as soon as possible. I have to sign these documents in 2 days.
Answer: If your lender agreed to the short sale and has said so in writing, then they cannot come after you for the deficiency. I am not sure about the IRS providing a plan for the taxes that you owe on this forgiven debt. But, you might be able to avoid paying
taxes on it 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,
- 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). You can read more on the FAQ section of the IRS's website .
Best,
Bill
www.bills.com
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). You can read more on the FAQ section of the IRS's website .
Best,
Bill
www.bills.com
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1. Posted by rose mora on Thursday 6th November 2008 22:18
i just sold my home in a short sale. 485k ( to 330k) i hear i will be getting a 1099 ? how many kind are there? and is there a forgiveness .. I wasnt told this by the real estate agent and how do i pay for this if i couldnt pay my house and there is one income and unemployement?
2. Posted by BIll on Friday 7th November 2008 09:05
you might be able to avoid paying taxes on it 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 tough: - 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. Also, if you do receive that 1099 ask your accountant about an IRS form 982 which would allow you to negate any 1099 income from cancelled debt income if you are insolvent. Good luck!