There seems to be a lot of confusion about who gets a 1099 when doing a short sale. Many sellers think that if the bank waived the deficiency balance that they won’t get a 1099. That is simply not the case. It’s easy – EVERYONE who has debt forgiven in a short sale gets a 1099. (Debt forgiven is also a taxable event for foreclosures, deeds in lieu and bankruptcy).
Sellers who complete a short sale and have debt forgiven should all be receiving a 1099 showing the difference between wait was owed and the amount the lien holder recovered via the short sale. The amount on the 1099 is typically taxed as ordinary income. Sellers who are considering a short sale should consult their tax preparer or CPA to determine in advance how this will affect their individual tax situation.
Many sellers confuse “deficiency waiver” with “debt forgiveness”. In a short sale the deficiency waiver is negotiated for the seller in order to keep the lien holder from pursuing future action to collect the remaining balance. This is negotiatble. The debt forgiven and subsequent 1099 is not negotiable. The IRS requires the lien holder to report this by law.
For many sellers who are doing short sales and the property is their primary residence there is a Debt Forgiveness Act in place until 12.31.2012 which will exempt many sellers from the tax liability. Again it is very important for sellers to consult their tax preparer or CPA to ensure they qualify for this.
For more information contact me.