If you are like the small, but growing army of folks who have dumped their homes back on the banks in a short sale—and are feeling pretty good that you managed to get the bank to forgive all that debt you owed—stand-by! The IRS is about to dump an even bigger one on YOU!
Ever hear of a 1099-C? Not sure? Well, most people probably haven’t. But some of you will. Soon.
The 1099-C (pdf) is the form you should get for the total amount your lender lost on the deal for your house. And, guess what? The IRS has its own view on this: It considers this “loan forgiveness” as a source of taxable income for you.
That’s right. If you short sold on your house, you are more than likely to get a bill from the IRS to pay up taxes on the amount of the forgiven debt or else!
Come on, you didn’t really think it would be THAT easy? Did you?
Now, while I am not an accountant (I don’t even play one on TV)–and, DISCLAIMER ALERT!!! DISCLAIMER ALERT!!!, you SHOULD consult with one! I can tell you there are some handy but painful ways to avoid coughing up the money to the feds you saved on your short sale.
If you are bankrupt…like really…as in court discharged…you will probably get a pass from the IRS on this one. Also, if you were legally broke (insolvent) BEFORE any agreement was actually reached on the value of the short sale you may not have to pony up a dime.
Like they say…the only sure things are death and taxes. So, what the hell did you expect?
Update: For more information, please see the following:
- The Mortgage Forgiveness Debt Relief Act and Debt Cancellation (From the IRS)
- The Harvard Journal on Legislation’s Examination of The Mortgage Forgiveness Debt Relief Act Of 2007
- Tax Relief for Cancelled Mortgage Debt
- Canceled Mortgage Debt and Taxes: Qualifying under the Mortgage Forgiveness Debt Relief Act
- 1099C: Is Foreclosure Or Short Sale Better?
- Tax Consequences of a Short Sale: Dealing with a 1099C
- Discussion:1099-C Short Sale – Cancellation of Debt
- Million Dollar Home Owners Turn to Short Sales