The income tax consequences of foreclsoure and shorts ales have been the subject of much interest due to the mortgage crisis...This article will provide an overview of the major Federal income tax issues..However it is not intended to provide advice on specific situations..Rather it will help real estate and mortgage advisors become more valuable assets to their clients by better understanding when to refer borrowers for professional assistance.
The fundamental concept is the federal rule about Cancellation of Debt Income (CODI). Briefly, debt that is cancelled or forgiven generally results in ordinary income to the debtor, unless an exception, such as bankruptcy, insolvency, 2007 Relief Act etc. applies..
By becoming familiar with the rules for their states, brokers and other advisors are in a position to refer borrowers for professional assistance and recognize improper reporting by lenders after foreclsoures or short sales.. If a borrower receives a Form 1099 from the lender showing erroneous recourse status or fair market value, the first step is to write the lender requesting a correction. If the lender refuses or fails to respond, the borrower's tax preparer should report the disposition correctly and attach an explanation of why the lender 1099 is incorrect.. While brokers and others in the real estate field should not offer firm conclusions on thes tax issues, a abasic knowledge of this are will make them a valuable resource to refere clients to qualified tax advisors familiar with the state's laws.
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