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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!
3. Posted by eric cotter on Friday 11th December 2009 07:07
would a 2nd mortgage be included in the forgiveness if in fact it was originally taken out to purchase the property along with the 1st mortgage? (80/20 combo purchase)
4. Posted by Bill on Friday 11th December 2009 09:56
Yes. See the IRS document The Mortgage Forgiveness Debt Relief Act of 2007 and the Library of Congress H.R.3648 Public Law 110-142 to learn more about the law.
5. Posted by kathy on Thursday 11th February 2010 08:33
I just did a short sale on an FHA loan. I have received a 1098 and a count recorded deed of trust saying that it has been paid satisfied and charged off. The bank payoff dept still shows a balance due the deficit.It was our primary residence but we had refi to pay off other debt. The last time we did a fefi we put 30 k down to get a lower fixed rate and lower payment. I have not received a 1099. I just requested one. Now I ,m not sure that I should have asked for one. Do I or do I not need one for fileing my taxes and being free of that debt?
6. Posted by Bill on Thursday 11th February 2010 08:43
"Charge off" in and of itself does not mean the debt is forgiven. From a legal perspective, charge off alone means almost nothing to the debtor. See Charge-Off & Credit Report to learn more about this term. Obviously, I do not have your documents in front of me so I cannot opine whether the deficiency balance for the FHA mortgage was forgiven. It is unclear from your message if you have a second mortgage. Consult with a tax professional, who can review your documents in person and give you a more precise answer.
7. Posted by Kathy Short Sale on Thursday 11th February 2010 09:20
The actual wording is " is fully PAID, SATISFIED, and DISCHARGED. os the short form- discharge of mortgage/deed of trust. This is a notorised mortgage Electronic Registration Systems with my loan number on it. I asked for a 1099 to be sent to me . Now I 'm worried that maybe I should not have requisted one.
8. Posted by Ana on Friday 12th February 2010 06:40
I did a short sale on September of 2009. The approval letter of the short sale said "settled" with the explanation "Account legally paid in full for less than the full balance."I'm ready to fill out my taxes but I was told I needed a 1099 form. Do I really need this form?
9. Posted by Bill on Friday 12th February 2010 09:00
Kathy: You will not cause yourself tax liability by asking for a 1099-A. Conversely, you cannot avoid taxes you owe if a creditor neglects to send you a 1099. You were wise to actively seek the 1099-A. Keep in mind the "Mortgage Forgiveness Debt Relief Act of 2007," which I mention above. The act may absolve you of any taxes owed, depending on your circumstances.
10. Posted by Bill on Friday 12th February 2010 11:32
Ana: You need the 1099-A, which discloses the amount of the loan the lender forgave. See the discussion on the "Mortgage Forgiveness Debt Relief Act of 2007" above for more information.
11. Posted by consumer credit counseling on Friday 5th March 2010 03:23
Thanks for the post it was very useful to maintain my financial matters.
12. Posted by Priya on Tuesday 16th March 2010 17:24
I did a short sale in September 2009 where the primary mortgage was paid in full, but the Home Equity Line of Credit was short -- we owed $78K, and the sale brought $28K. The HELOC owner did not accept that as a short settlement and is pursuing the full amount, so far no 1099 received, but given that they are not accepting our settlement offers, it could go to court. If the 1099 us, do we have to claim that as income, even if they pursue us in court?
13. Posted by Bill on Wednesday 17th March 2010 07:51
You should consult with an attorney, but they cannot really give you a 1099 for cancellation of debt income if the debt is not settled or formally cancelled. Keep trying to settle, or even call Freedom Debt Relief at Freedom Debt Relief Website about engaging a third party firm to settle the deficiency balance for less than is owed. Good luck and let us know how it goes. Bills.com
14. Posted by Priya on Wednesday 17th March 2010 08:29
Bill: Thanks for your response. We are working with a 3rd party negotiator (Consumer Recovery Network), but Wells is still not budging. In a free consultation (just the other day), an attorney advised us to threaten BK, and allow it to go to court. By the way, the HELOC was granted via Lending Tree, whose appraisers valued the home (just 7 months after purchase) at 20% above purchase price (loan given in June 2006). No way house value went up that much. Wells bought this loan. If they would've only granted us what the house was worth, we probably would have paid everything off in full with the sale...