Here at Coastal REO Solutions we understand your concerns about a potential short sale, foreclosure, or deed in lieu of foreclosure. So we have formulated a Frequently Asked Question page about the 1099-C income tax that comes with a short sale to help you through the information stage.

What is 1099-C income?
This is when a Lender forgives (charges off) mortgage debt that you owe. They take the Tax Write off so you have to take the Tax Gain.

Is Cancellation of Debt income (1099-C)  always taxable?
Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:

1.Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.

2.Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.

3.Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets. (Be sure to check back on our Blog Post on “the Insolvency Exclusion”)

4.Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.

5.Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.

If the forgiven debt is excluded from income, do I have to report it on my tax return?
Yes. The amount of debt forgiven must be reported on Form 982 and this form must be attached to your tax return.

If the Lender does not waive the deficiency balance or they “reserve the right to pursue a deficiency judgment” (do not forgive the debt you owe) will they still issue a Form 1099-C to the IRS.
No.  Your Lender only issues the 1099-C if they forgive the debt you owe. They cannot Demand a Deficiency Judgment and issue the Form 1099-C.

How do I know if I was/am insolvent?
You are insolvent when your total debts exceed the total fair market value of all of your assets.  Assets include everything you own, e.g., your car, house, condominium, furniture, life insurance policies, stocks, other investments, or your pension and other retirement accounts.  Sample Worksheet

How should I report the information and items needed to prove insolvency?
Use Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) to exclude canceled debt from income to the extent you were insolvent immediately before the cancellation.  You were insolvent to the extent that your liabilities exceeded the fair market value of your assets immediately before the cancellation.

Are there any publications I can read for more information?
Yes.

1. Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals) is new and addresses in a single document the tax consequences of cancellation of debt issues.

2. See the IRS news release IR-2008-17 with additional questions and answers on IRS.gov

3. The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

Coastal REO Solutions is one of Myrtle Beach’s most experienced and qualified short sale real estate firms. If you need help, we are ready to assist you by talking with your mortgage lender for you. Coastal Solutions is a full service real estate brokerage firm and we can assist you through the process from marketing and sales, all the way to the closing table.

If you are a first time home buyer or a savvy real estate investor looking to buy a Myrtle Beach short sales or foreclosures, we have a custom search engine that is free to use.

Contact Jason Ellis at Coastal REO today to get started.

Preparing a tax return with 1099-C income from a short sale or foreclosure will be challenging, and reporting exclusions could be even more problematic. At Coastal REO, we think it would be wise to consult with a CPA to be certain you get good information when filing your taxes. Be positive your tax preparer is specifically educated in the rules of 1099-C short sale income, or you might end up paying too much or too little in income taxes. More importantly, it is vital that you know the facts of your individual short sale transaction to avoid any potential problems. We hope this article has been some help in your understanding, but please consult a tax professional if you have any questions at all.

This entry was posted on Tuesday, January 10th, 2012 at 4:34 pm and is filed under Foreclosure, Short Sales. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.