Archive for '1099-c'

Taxable Gain on Cancellation of Debt from Loan Modification, Short Sale, Deed in Lieu or Foreclosure

Tuesday, December 22nd, 2009 at 10:06 pm  
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In a loan modification, short sale, foreclosure or deed in lieu of foreclosure, the owner can receive “capital gain or loss” as in any other sale of real property.  The owner will be subject to capital gains taxation on the “forgiveness of debt” or “cancellation of debt” but can also receive a credit for a capital loss (only on investment properties).

Taxable ordinary income is triggered by the lender’s forgiveness of debt of $600 or more.  The lender is required to issue a 1099-C (“c” for cancelled debt) but it is the individual’s responsibility to recognize a capital gain.  

Please consult with a CPA because each situation is going to be different.

Foreclosure and short sale tax liability

Sunday, November 22nd, 2009 at 9:33 pm  
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If you are going to choose between a short sale or foreclosure you need to understand the tax liabilities of your decision. There is going to be a certain amount of cancelled debt in either scenario.

You should consult a CPA and/or tax attorney.

The following is general knowledge

  1. The lender will issue a 1099-C in a short sale (unless they pursue a deficiency judgment); C is for cancelled.
  2. The lender will issue a 1099-A in a foreclosure (unless they pursue a deficiency judgment); A is for abandoned.
  3. The 1099 issued is for the amount of the lenders loss from the short sale or foreclosure.
  4. The loss is almost always less in a short sale since there is additional cost when the bank forecloses and then has to sell the property. Short sales typically yield a higher purchase price and a lower loss to the lender.
  5. The homeowner may not be liable to pay taxes owed the IRS on the 1099 in either case with IRS Tax Form 982 (http://www.irs.gov/irs/article/0,,id=179073,00.html).
  6. The homeowner may not be liable to pay taxes owed the IRS per the Mortgage Debt Relief Act (MDRA) (http://www.irs.gov/individuals/article/0,,id=179414,00.html).
  7. State tax law regarding 1099’s on short sales and foreclosures is not necessarily in line with federal tax law.
  8. Generally speaking you won’t owe the IRS taxes on the 1099-C if you acquired the home with a purchase money loan (vs refinance loan)

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