I often get the question... Will I have to pay taxes on the amount the bank writes off on my short sale?
The answer is NOT a simple one, it depends on the situation. Legislation is currently being proposed that will further simplify the issue, but in the mean time, there are cases where you WILL NOT have a tax liability.
#1 - Not ALL lenders actually issue a 1099 to their borrowers.
#2 - There are rules regarding insolvency. Here is the response from my CPA on this issue:
According to IRS Publication 908, Bankruptcy Tax Guide, income from cancellation of debt can be excluded from income on an individual's tax return if the cancellation takes place when the individual is insolvent, but only by the amount of the insolvency.
Insolvency is when an individual's liabilities exceed the fair market value of their assets. Determine your liabilities and the fair market value of your assets immediately before the cancellation of your debt to determine whether or not you are insolvent and the amount by which you are insolvent.
The amount excluded must be used to reduce certain tax attributes. These don't apply to most people, but they are net operating loss, general business carryovers, minimum tax credit, capital losses, basis in other properties, passive activity losses.
Form 982 needs to be attached to the person's 1040. This shows that the cancellation of debt income is being excluded.
- This of course is intended for informational purposes ONLY and should not be used as a substitute for professional tax advice. You should contact your CPA if you need advice on how to handle your individual situation!
Great information. I have heard this question a lot in the past few months. I assumed the 1099 was automatic. What is the lenders discression on wether or not they issue it, as u said some do and some dont?
Rob
Great post Ralph. On point #1 though - not getting a 1099 does not mean its not taxable. Point #2 must apply.
Nancy Moeller, REALTOR®, CPA