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Information on 1099 Income From Short Sale

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Mark Cappel
UpdatedOct 20, 2008
Key Takeaways:
  • The Mortgage Forgiveness Debt Relief Act will prevent some homeowners from paying taxes on forgiven mortgage debt.
  • Meet with a tax professional any time you have a debt forgiven, to fully understand your tax obligations.
Will IRS provide me any payment plan for the taxes that I owe after the short sale deficiency balance is reported via 1099?

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 $80,000 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.

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. Congress wrote very specific requirements for MFDRA:

  • The mortgage is for the homeowner’s principal residence. The act does not apply to 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 any 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 (PDF), 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.