Short Sale 1099 for taxes???

Question

If a person does a short sale and receives a 1099 as if they collected money.. the difference between whats owed and the short sale price... Is there not tax implications?

Jon Holdman · Answer

You might point out the homeowner that if the thing goes to foreclosure, they will still end up with the 1099.  Likely it will sell for even less at the foreclosure.

Again, if its their residence and the debt is for acquisition or improvement, they will get the 1099, but can avoid the taxes.

Jon Holdman · Answer

If its a personal residence and the forgiven debt was used for buying or improving the property, the seller may be able to avoid taxes.  If the forgiven debt was a HELOC used to buy nice vacations and expensive toys, then its still taxable.

If you borrow money, spend it, and don't pay it back, that sure sounds like income to me.  There's no "as if they collected money" to it.  They DID collect money, even if that money went to pay for the house.

Tom Medwin · Answer

This one is tough because the homeowner connected me with the end-buyer and knows how much they are willing to pay, which is about $40k more than I'm paying.  So the homeowner will be very upset with a 1099 because their 1099 with me will be a lot more than if they sold to this end -buyer.  Also, the house is not their primary residence but an investment property which makes it tough.  So I told the homeowner if the bank won't waive the 1099 then I'll step out of the deal and let them sell for a higher amount to someone else for less tax liability.  I really hate to do that, though, knowing I got such a good discount on this one.

Tom Medwin · Answer

What are the chances of negotiating with the bank to not issue a 1099?  I have a verbal approval on one right now and the 1099 would be like $90k.  The seller doesn't want to do it for that large of a 1099.  What am I supposed to do, give the bank more money so the 1099 is less?  No chance, but I told the homeowner I won't do the deal if the bank won't waive a 1099.  I'm just wondering if anyone has had success doing that?

Account Closed · Answer

Depends if it is your personal residence probably not.  If it is investment property then, yes it will be taxable.

Here is the IRS article -

http://www.irs.gov/individuals/article/0,,id=179414,00.html

Josh Green · Answer

absolutely. you will get a 1099-c. the irs views the 'loan forgiveness' as taxable income. 
          
     http://www.biggerpockets.com/renewsblog/2010/01/13/1099cs-turning-short-sale-big-headache/
          
          disclaimer: keep in mind that this is not legal or accounting advice. consult your advisors.

Short Sale 1099 for taxes???

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