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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?

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.

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Highlights

  • 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.

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.

Best,

Bill

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63 Comments

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  • DM
    Feb, 2013
    Don
    Oak Harbor, WA
    Hi I am active duty military and was PCS'd in September of 2012 from Virginia Beach, Virginia to Whidbey Island, Washington. I short sold my home on July 31st 2012. I recieved two 1099c's from my mortgage companies, bank of america and green tree servicing. Bank of america held the 80% and Green tree held the 20%. The 1099c's totalled a little over $102,000.00. Am i going to have to claim this as income and pay taxes on this or will i be able to use the mortgage forgiveness debt releif act? I read the instructtions for form 982 but the wording is hard for me to understand. I am just trying to find out what i am going to have to do. I dont know what i will do if i have to pay taxes on that amount!!!??? Any help is greatly appreciated! Don
    0 Votes

    • BA
      Feb, 2013
      Bill
      Don, if your home meets the IRS' definition of a primary residence, you should be eligible to not pay taxes on the forgiven debt. What you need to do, given the high stakes involved, is to speak with an experienced tax preparer, to make sure that you can indeed get the protections of the Mortgage Forgiveness Debt Relief Act and that your tax return is filled out properly.
      0 Votes

  • JM
    Jan, 2013
    Jeff
    Ontario, CA
    In 2012, I completed a mortgage modification that discharged $91,500 from my debt. I received two 1099-Cs, one for my ex-wife and one for me. My ex has not lived in the residence for a couple of years. A couple of things are odd to me: If both our names are on the current mortgage, why send two separate 1099-C forms? Why do both forms have the same exact amount ($91,500)? It seems as if the mortgage company is double-dipping here because if we both claim this as income, then it doubles the actual amount. Also, I understand I qualify for the debt relief act, but does she? Thank you.
    0 Votes

    • BA
      Jan, 2013
      Bill
      I am not a tax professional, so I can't give you formal tax advice, but I will share a few thoughts with you.

      It sounds like both you and your ex-spouse were jointly and severally liable for the mortgage debt. Based on the facts and circumstances, you and your ex-spouse must coordinate and determine who was responsible for how much of the debt. If you are 100% liable (per a divorce decree or similar contract), you would claim 100% of the cancelled debt on you return, unless he qualifies to exclude the cancelled debt. In that case, the ex-spouse would need to attach a statement to her separate return explaining those circumstances. If the ex-spouse was liable for a portion of the debt, she would need to include her portion on her return unless she herself qualifies to exclude her portion of the debt (and also attach a statement explaining that she was only responsible for a portion of the cancelled debt).

      Speaking with a tax professional is probably a wise choice for both you and your ex.
      0 Votes

  • SM
    Apr, 2012
    Scott
    Calabasas, CA
    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
    0 Votes

    • BA
      Apr, 2012
      Bill
      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.
      0 Votes

  • CT
    Apr, 2012
    Chris
    Charleston, SC
    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?
    0 Votes

    • BA
      Apr, 2012
      Bill
      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.
      0 Votes

  • LB
    Feb, 2012
    Lyn
    Ocala, FL
    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.
    0 Votes

    • BA
      Feb, 2012
      Bill
      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.
      0 Votes

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