Short Sale/1099C Question

We are currently working to finalize a short sale on our home.  I understand that it is possible that B of A will issue a letter of forgiveness for the shortage however I am concerned regarding the issuance of a 1099C and us being liable for a huge tax bill. 

I read where it it may be necessary to file bankrupsy to avoid this but that if it is an option that it has to be filed before the short sale if finalized.  

Could anyone help me understand this process?

Thanks

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Replies to This Discussion

Permalink Reply by Shannon Jones on December 2, 2010 at 2:39pm
Debbie,
If BofA forgives the debt, then they are required to issue a 1099. For specific questions about your tax situation, please consult with your tax consultant. However, as far as general information, I'd highly recommend checking out what the IRS has to say: http://www.irs.gov/individuals/article/0,,id=179414,00.html will provide some good background on the Mortgage Forgiveness Debt Relief Act. Another article that also provides good information on whether a 1099-C is taxable can be found at: http://www.irs.gov/newsroom/article/0,,id=174034,00.html. There is also some good information on the site about insolvency. If you don't qualify for the Mortgage Debt Relief Act, you may some tax relief if you are insolvent.

Best of luck with your short sale!

Shannon Jones
Keller Williams Realty
Long Beach, CA
Permalink Reply by Jeff Payne on December 3, 2010 at 3:30am
Good advice Shannon, Many times sellers tend to "freak out" when they get a 1099 before talking to their CPA only to find out later that the CPA can remedy the situation.
Permalink Reply by Gina McKinley on December 3, 2010 at 4:47am
The Debt Relief Act will cancel out having to pay tax on the debt forgiveness if it is your primary home. However, there maybe instances where tax is still due if you refi'd. The IRS issued a form to cancel out the 1099-C which your CPA can file on your behalf. Also, Debit Forgiveness, a 1099-C, is never taxable is you are insolvent and finally, if you are in an anti-deficiency state, the IRS has ruled that non-recourse debit is not taxable. Each situation is different depending on your personal circumstance, so please seek the advice of a qualified CPA for you specific needs.
Permalink Reply by Joan Psarros, CDPE, CRS, SFR on December 3, 2010 at 6:15am
If this is your primary home than a 1099C shouldn't happen.
Permalink Reply by Jeff Payne on December 3, 2010 at 6:35am
Joan, not true, the 1099C will still be issued but if it is the primary home, there will be no tax liability.

Joan Psarros, CDPE, CRS, SFR said:
If this is your primary home than a 1099C shouldn't happen.
Permalink Reply by Gerald Demers on December 4, 2010 at 8:19pm
Disclosure first: I am NOT a CPA!

One thing I have all my sellers do IMMEDIATELY AFTER WE CLOSE is to go to my CPA (or theirs if they prefer) and do an independent audit/balance sheet at the point in time one day BEFORE the closing; their assets and liabilities will include the house and its debt. They will need such a document when submitting their tax forms the following year. The document shows the IRS an independent professional determination of their insolvency and thus, removes the 1099's tax implications. If they don't do this now, it is really tough to piece everything together months later.
Permalink Reply by Paul Francis - Vegas Short Sales on December 16, 2010 at 7:15pm

Here you go..

 

http://www.irs.gov/irs/article/0,,id=179073,00.html?portlet=2

 

(Make sure you read the entire page...)

Permalink Reply by John Bell on December 20, 2010 at 3:21pm

Joan: for Clarity Jeff is right, by law the 1099C is supposed to be issued and if so the Form 982 must be filled by the CPA or Tax Preparer, see attached file with highlights in yellow.

John Bell - Short Sale Expert la Jolla, CA



Joan Psarros, CDPE, CRS, SFR said:

If this is your primary home than a 1099C shouldn't happen.
Attachments:
Permalink Reply by John Bell on December 20, 2010 at 3:28pm

By law the 1099C is supposed to be issued and if so the Form 982 must be filled by the CPA or Tax Preparer, see attached file with highlights in yellow. There are 3 Exemptions according to the iRS site: 1. Primary Residence, 2. Non-Refi Loan, 3. Insolvency but only if 1 and/or 2 do not apply (great for 2nd homes or rentals). Insolvency does not mean BK just Liabilities (all) exceed Assets (all). A BK can be avoided in most cases, most attorneys I spoke with recommend doing the short sale first then a BK only if absolutely necessary. John Bell - Short Sale Expert la Jolla, CA

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