1099 concerns from Seller

Any thoughts on the subject would be appreciated. The seller has talked to their CPA and has been advised they will not be able to claim the house they are short selling in Idaho as their primary residence - as they have claimed AZ as their primary residence for the last few years. 

 

Got offer on house - it's low - but I feel there are comps out there to support it. 

 

Seller is very concerned about accepting as it would create large difference for 1099 the bank tells him they will send - if a short sale is done. (But they also told him they will not seek deficiency) 

 

I've heard of investors taking 100-200K hits on investment properties - do they just turn around and deal with the tax consequence then? My seller is not insolvent. The house was their primary residence and the only home they currently own. They just haven't really been living there for 2 years or so. 

 

???? thoughts?

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Permalink Reply by Bryant Tutas on December 30, 2010 at 5:18am

Julie. The sellers are right not to accept an offer that is too low. Being able to justify it is not the point. The point is that the lender will want FMV (Fair Market Value) AND the smaller the loss the smaller the 1099 amount. Their CPA needs to continue to advise them in this area.

 

I would imagine that property investors taking these huge hits are going to be dealing with the IRS for many years to come.

 

I think primary residence is 2 out of 5 years for tax purposes.  Here's the link to the Debt Relief Act

Permalink Reply by Julie Cendejas on December 30, 2010 at 5:28am

Thank you Bryant - 

The scary thing is I think this could be seen as FMV or close to. But do we counter to something higher and risk losing the buyer or do we let the bank counter if they choose to - after the BPO is received? 

Thanks for the link also. 

 

 

Permalink Reply by Jeff Payne on December 30, 2010 at 5:59am
I think that as long as it is FMV, that is what you need to send to the lender.  If you are close to FMV, send it to the lender and let them make the decision.  As far as the 1099, at some point the seller is going to have to make a choice.  Take the tax hit (which his CPA should be able to lessen by offsetting his losses), keep the house or let them foreclose.  In any instance the seller could have a financial liability either thru the 1099, a judgement or to pay up on the house.  Short sales don't always mean the seller washes their hands of the property and come out smelling like a rose.
Permalink Reply by Mark Sawyer on January 1, 2011 at 3:33am

Go to http://www.irs.gov/pub/irs-pdf/f982.pdf  they may qualify for relief from the tax liability under this program.  I have spoken with a number of accountants who are not aware of this.  I recently completed a short sale of a CPA's home and neither he nor his wife, both experienced accountants were aware of this program.  Have your seller present the form to their accountant. 

Permalink Reply by Steve Early on January 3, 2011 at 11:59am
In addition to disqualifying this from the 1099 exemption as a primary residence, did the CPA also review the potential tax ramifications of this an investment property?  There is one additional tool I'm aware of that the seller might be able to use - IRS Form 982 - to demonstrate insolvency which may provide tax benefits as well. Once again, as Bryant suggested, the CPA should be guiding them through this.
Permalink Reply by Steve Early on January 4, 2011 at 11:51am


Ooops - not a form 982 - that is for a primary residence.

I meant to say Insolvency Worksheet (which should be available on the

IRS's web site.)


Steve Early said:

  There is one additional tool I'm aware of that the seller might be able to use - IRS Form 982 ...

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