Short sale and 1099 question.

Asked by Ute Ferdig, Newcastle, CA Thu Apr 3, 2008

I have received conflicting information as to how the lenders that forgive a debt in a short sale handle the forgiven debt. Some claim that the lenders will still issue a 1099 and then it's up to the taxpayer to claim the exemption under the Mortgage Forgiveness Debt Relief Act. Others claim that the lenders don't even issue 1099s anymore. Since not everybody who got a short sale approved qualifies under the debt relief act, it does not make sense to me that the lenders would not even issue 1099s anymore as they are not the ones that decide who qualifies and who does not. I would like to hear from my fellow Trulia Real Estate Pros and CPAs what your take is on this.

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14
Chris W Bern…, Agent, Bend, OR
Thu Apr 3, 2008
BEST ANSWER
Hi Ute,
The IRS form 982 (revised in February of 2008) entitled "Reduction of Tax Attributes Due to Discharge of Indebtedness" deals with the handling of a 1099 for certain qualified properties. It is my understanding that the lender will issue a 1099 and it is up to the seller to file the appropriate form (if it applies to their situation) in order to receive the benefits of the Mortgage Forgiveness Debt Relief Act. I recently searched through the IRS website to find information on this topic for a good friend and client, because I kept hearing conflicting versions of this process. I found several articles that address this topic and offer explanation on filling out form 982. However, it is still not perfectly clear. I was going to go in and talk with someone at the local IRS office after tax season. I would be happy to email you a link to the forms if you would like. I would love to hear what others have to say on this topic.
1 vote
John Amos, , Los Angeles, CA
Sat Aug 16, 2008
If you request that the lender not isuue a 1099 upon the close of the transaction and make it a line item addendum to the original purchase agreement...they will not. There are distinct differences between an agreed short sale and a foreclosure sale. In a foreclosure sale, the foreclosed borrower can't receive the 1099 because they surrendered the property! Under a short sale, the lender agrees to the lower amount to merely release the trust deed against the property.

Where folks get stuck is when the borrower decides to dump a property, perhaps one they don't honestly live in but claim as owner occupied. The value is low and the rents just don't cover the mortgage. They get an approved short sale from the lender but for some strange reason the lender figures that the borrower is less than honest and just dumping an asset. That's where the 1099 should show up. The "new" Housing Bill does not have any provisions that allow for relief of "Investment Debt" as would a second home be classified. Remember...the key words are owner-occupied!
1 vote
Jeanne Heroux, , Harwich Port, MA
Fri Apr 4, 2008
I recently spoke with a lender who said they are issuing 1099s. Here is a form 982 and instructions, which gives some good info. http://www.irs.gov/pub/irs-pdf/f982.pdf
1 vote
Leanne Smith, , 95247
Thu Apr 3, 2008
hi Ute, currently, all of the lenders I am working with in short sales are still sending sellers 1099's.
hope this helps!!
leanne smith
1 vote
Ute Ferdig, Agent, Newcastle, CA
Thu Apr 3, 2008
Hi Chris. Thank you so much for the info. I am glad I am not the only one who thinks that the lenders are still going to issue the 1099s. I started wondering as I have heard conflicting reports and it just did not make sense that the lenders would not even issue the 1099s anymore. I'll take a look at IRS form 982 to see what it says. Thanks again for sharing the info.
1 vote
Elisette Oca…, Agent, Franklin Square, NY
Thu Feb 2, 2012
I recommend you look up and read the follwing....
The Mortgage Forgiveness Debt Relief Act and Debt Cancellation
http://www.irs.gov/individuals/article/0,,id=179414,00.html

If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable. The Mortgage Debt Relief Act of 2007 generally ...

Please comment ...Eli :)
0 votes
Coaster1964, Renter, Reston, VA
Tue Mar 1, 2011
i was issued a 1099c after my short sale, do i file it on my taxes? i dont want to pay taxes just because i did short sale i need a tax refund, what do i do, please me.
0 votes
Ute Ferdig, Agent, Newcastle, CA
Wed Apr 28, 2010
Thanks Short Sale Specialist. My question is 2 years old and I have not heard anyone in a long time claiming that the lenders don't even issue 1099s when they forgive the loan. I think we all know now how it works and we have moved on to other unanswered questions. There is always something that changed and something new that we need to figure out. It's never dull.
0 votes
Mike Linkena…, Agent, Jacksonville, FL
Wed Apr 28, 2010
We have a group for this on our short sale agent networking site:
0 votes
Anand, , Salinas, CA
Mon Feb 22, 2010
Please pass this info to all homeowners who lost their property either thru foreclosure or short sale in 2009. There is a new bill AB1779 (Introduced by CA Assembly Member Niello, February 9, 2010) which will be in assembly on March 12. All home owners who lost their property must contact their local assembly member and request them to support this bill. The objective of the bill is to extend the tax forgiveness in State of CA till Jan 01, 2013. If the bill fails thousands of home owners who lost their property in 2009 will end up paying tax to CA FTB for their cancellation of debt 1099C sent by their mortgage companies.

Website to find the local assembly member:
http://www.leginfo.ca.gov/yourleg.html

The pdf version of the BILL #: AB1779 can be found at the below location
http://www.leginfo.ca.gov/pub/09-10/bill/asm/ab_1751-1800/ab…
0 votes
The Hagley G…, Agent, Pleasanton, CA
Mon Dec 1, 2008
The lenders are indeen issuing 1099's....I play it safe and advise my clients to seek legal and/or tax advice about their situation.
0 votes
Charita King…, , Downey, CA
Mon Dec 1, 2008
How about the property (SFR), owner occupied with renters in the back? If sellers were to be forgiven, the property has to be owner occupied (not investment). We are aware that lots of our short sale listings have tenants in the back and we are disclosing it to the bank. Are we considering this type of property "owner occupied/investment, therefore they can be issued 1099?

Charita King
562-276-8681
0 votes
Jeremy McHugh, , Athol, MA
Mon Nov 17, 2008
Thank you ALL so much with this information! I now can advise my clients to seek advice from their accountant AND lawyer, while handing them some info from the source!
Web Reference:  http://www.JeremyMcHugh.com
0 votes
Pam Winterba…, Agent, Danville, VA
Fri Apr 4, 2008
Ute.....

it is my understanding the lenders are still issuing 1099's as they do not know to does or does not qualify. Properties that are not owner occupied do not qualify under the guidelines. I have been referring my clients to talk with their CPA's for tax advise on this.
0 votes
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