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1099 REPORTING - IT'S THE LAW! - OR IS IT???

1099 SHORT SALE REPORTING - IT'S THE LAW! - OR IS IT???

Since I have developed my SHORT SALE law practice I have a lot of clients that are in foreclosure or close to it. They all ask me about 1099 reporting and if the bank can forgive the debt and not issue a 1099. Lots of blogs say that plenty of banks don't issue 1099's on forgiven debt. Others say that the law is that if the lender does not report, it is in trouble with the law. The General Instructions from the IRS applies penalties for not filing informational returns (such as 1099's).

Now let's see what the law really says.

Debt forgiveness triggers two types of requirements depending on the circumstances.

1099-C The 1099C is when there is a cancellation of debt. This would apply to the normal short sale, where the lender takes less than the amount of the mortgage debt so the house can be sold. If the lender does not pursue the borrower for the short fall, then the 1099C is to be issued by the lender to the borrower.

1099-A The 1099A is when there is an abandonment of property and cancellation of debt. This would apply to a deed in lieu of foreclosure or to a foreclosure sale where the possession of and obligation to maintain the property is transferred to or obtained by the lender, relieving the borrower of the continued obligation of the debt.

The requirement to issue the 1099-C or the 1099-A is an obligation of the lender. HOWEVER, FOR 2008 AND PRIOR YEARS, FAILURE TO FILE A 1099-C CARRIES NO PENALTY ACCORDING TO IRS INSTRUCTIONS. Penalties usually associated with the failure to report a 1099 are found in the General Instructions at Part O. It appears that the exception for non-reporting is only to apply to 1099-C.. The 1099-A for abandonment still carries the IRS penalties for non-reporting.

If a borrower is issued a 1099 A or C, that sum reported can all or partially be charged to the borrower as ordinary income. There are several ways to avoid the effect of the reporting of that ordinary income, but that is for another article.

So, for now at least the lenders are indeed free to cut deals NOT TO REPORT forgiven debt without a penalty to the lender.

It doesn't take a tough negotiator to get the deal for non-reporting in writing from the lender - it takes knowing the law and the rules as well as or better than your adversary. Now you know how to pull out the facts and slam dunk the lender's response that they have to report - "it's the law". But here is a caveat - not reporting income is a crime, so consider the consequences.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com New Website www.Florida-Counsel.com. See our easy to find articles at Need Short Sale Information? - These Articles Probably Answer Your Question

Posted by Richard Zaretsky, Florida Real Estate Attorney on 03/28/2008 10:07 PM

Comments (37)

1099’s and Short Sales in the Home Selling Channel

1099 and short sale, irs form 1099, 1099c short sale, short sale lawyer, short sale attorney, 1099 short sale, short sale expert

Originally posted at: Z's Legal Short Sale Blog: 1099 REPORTING - IT'S THE LAW! - OR IS IT???

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37 Comments on 1099 REPORTING - IT'S THE LAW! - OR IS IT???

MAR

2008

Richard- thanks for the clarification.

JUN

2008

Thanks for the article. I have a question. I have business property, which is in foreclosure. If my lender forgives the mortgage debt and issues a 1099. Do I have to pay the taxes since I have s-corporation for my business? If yes, can Chapter 7 wipe out the tax liabilities of 1099? Please advise me. Thank you.

JUN

2008

Peter

You need the advice of your company CPA and how section 108 might apply to the financial event and situation of the company.

Bankruptcy can eliminate certain tax liabilities. But bankruptcy should always be a last resort. You need to consult with a corporate bankruptcy attorney for this answer. Be sure it is one familiar with reorganizations.

Good luck

JUL

2008

Hi Richard, I have a question and appreciate any insight...

if you sold investment homes as short sales that were rented out for a year or two before the short sale and the individual that owned the homes can prove insolvency at the time of the short sale, is this a situation where the cancellation of debt income (1099c) can be nullified? In other words, does insolvency help you twrite off the 1099C income even for investment/rental homes that have been sold as short sales? Thanks! -Neil

Neil -

That is the way I read the law.

There are two parts of this application. One is via Code section 108(a)(1) referenced in this article. The other is the common law principle of the "tax benefit rule" with deals with forgiveness of interest (not principal).

Richard,

Thanks for the response... one other question... my lender accepted the short and deficiency of about $50,000 without a promissory note but they told me that since I was paying PMI insurance every month that the PMI covered my lenders loss.

So when I think about the fact that I paid an insurancee policy so my lender could be made whole and therefore they didn't actually forgive my debt but were paid by the PMI... why then would they also send me a 1099C and write it off as if they forgave the debt and more importantly for me could I make the argument that the $50,000 was not a cancellation of debt and therefore not taxable income for me since it was paid as an insurance claim for which I paid the insurance premiums?

Somehow it doesn't seem fair that I should have to pay income tax on the $50,000? Your thoughts?

Neil

That is a great argument. I have not actually researched this, but my gut tells me that it fails though because the terms of insurance are in the nature of a guarantee, not a "loss" like a casualty. Since it is a guarantee of your performance, the insurer when it covers the loss is allowed to subrogate its claim - meaning it can go and stand in the shoes of the lender and collect what it paid out because of your failure to perform according to the contract (promissory note and mortgage).

If the PMI also gave a release, then you are scott free and you have received the benefit of the forgiveness - thus the income.

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@FLORIDA-COUNSEL.COM - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com

JUL

2008

richard

if a rental property is sold as a short sale, what about rent that was collected while the mortgage was not paid. what is the tax liability?

thanks

frank

Frank

Rent is always income, whether you pay the expenses of the property or not. The expenses, if paid, are an expense (deduction). This is a generalized statement but it fully answers your question.

OCT

2008

Richard,

Our lender, of our rental property, gives an option of a deed in lieu prior to foreclosure, avoiding the actual foreclosure. Would this be something reported on a 1099-A or a 1099-C?

Chrisanna

Chrisanna -

Yes, this is a reportable event as a 1099A because the lender has exchanged a security interest in a property for ownership in the property. If the lender also cancels your debt to pay them back, then in addition to reporting the 1099A, the bank is to issue a 1099C which indicates the debt was abandoned. the first paragraphs of the link in the article for the IRS Instructions (linked here too) for 1099A and 10099C tells the story.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@FLORIDA-COUNSEL.COM - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com NEW Website www.Florida-Counsel.com

OCT

2008

I have a house in FL that I lived in for a year, then rented it out. I left the state because of job loss and moved back to Arizona (only place I could get another job). The tenants are out next month (Nov) and have already begun the short sale process. Given Bush's mortgage law of 2007, will I be 1099'ed? I put 20% down and owe 215k. I am predicting that the short sale might net the bank 150k or so. I am late one month with my payments.

thanks

Tony

The answer is Yes. But you may have a legal option to disregard the income you report on your taxed calculation. See my post about Always Having Income.

JAN

2009

I used to own investment properties, one in California and 2 in Vegas, all three properties went into folclosure in 2008, I just received a 1099A. What do I do with this and how do I get out of paying taxes for it?

I only make enough money to survive,

FEB

2009

Richard,

I am a hard money lender for construction loans and have foreclosed on several builders. Am I as an individual required to file a 1099-a or just businesses? Also does recording of a Trustee's Deed Upon Sale constitute a "taxable event" in the eyes of the IRS? Can I now take a capital loss on the note based on the Trustee's sale price and set my tax basis for the real property?

Diana -

Your questions go beyond my expertise and they need to be answered by a CPA. May I suggest you question him or her directly on the issues of a 1099A and 1099C. Note that you have not taken a loss until you determine the non-collectability from the borrower of the remaining unpaid debt after the sale or taking of the trustee's deed (or if in the event of a deed in lieu of foreclosure, the forgiveness of the remaining debt).

MAR

2009

Have you seen in evidence of lenders going after deficiency judgements in Florida on investment properties?

APR

2009

Ray

Yes and it is going to be a lot more prevalent in about 24 months!

APR

2009

I live in Florida and am not delinquent on my mortgage. I have my house up for sale and have a cash buyer interested for $62,000.00 less than what I owe on my home. I have been requested to do a short sale even though I am current and am curious to know if this will harm my credit in any way. Also would like to know if I am going to be held responsible for the additional money for the mortgage and/or the taxes.

APR

2009

Hi Richard, quick question. I went through a short sale last year and the debt was forgiven. I didn't recieve a 1099C from the lender. Instead, I had a form 1099S that was given to me at closing showing the sale price.

My accountant reported this transaction along with the original purchase price of the home in an attempt to report the situation. Since you explain that all debt forgiveness must be reported, how will this affect my situation..?? If the Lender doesn't file the 1009C, is it my responsibility to file or do i wait until they file..?? Kinda lost..

Thank you

APR

2009

Denice

First to your last comment about negotiating so you get no 1099. What you are really saying is you don't want to have to pay income tax. The only sure fire way to do that is repay the bank in full and have no forgiven debt. Alternatively, see my article at SHORT SELLER STILL MUST DECLARE INCOME ON SALE!

Regarding the avoidance of a deficiency, what you want them to say in writing in the letter is that (1) the balance of the debt is forgiven; or (2) the deficiency is waived; or (3) the promissory note is cancelled; or (4) the loan is satsified. Any of these statements would do, but if you cannot get it in writing you are indeed subject to the whim of the next person to look at the file or own the right to go after you on the difference - at least for the next 5 years after the date of the short sale.

Paul

If your employer fails to file his w2 for you does that mean you did not get any wages?

Same application for the 1099C. Just because it was not filed did not mean you did not get "forgiven debt" income.

AUG

2009

Debt on my business credit card (s-corporation) was forgiven. Does creditor send 1099 to me or to my business. I mean, is this forgiven amount income of myself or my business?

AUG

2009

Who is the primary obligor on the card? It should be the one they have the tax id number on.

NOV

2009

If a corporation purchased a piece of property and an individual owning 10% of the corporation personaly guaranteed the mortgage, does the 1099 go to the corporation or the individual upon foreclosure?

FEB

2010

We got 1099 A form for our foreclosed rent house. I know that the bank is still the Owner . What happens when the bank finally sells it for less than we owe?

Aga

The dispostion of the property AFTER the lender has taken title is NOT a factor in determining the tax event to you. The tax event (the value of the property - ie: how much was made or lost) is determined on the date the bank took back the property or the date it was sold at the foreclosure sale [in any event it is the date you became the "previous" owner]. So if the lender sells the house for double your mortgage amount, you did not make a profit - that later event is just not a factor.

FEB

2010

Hi Richard,

We just received a 1099-a for a foreclosed property. But the FMV is much lower than what our realtor says it should be. I have two questions:

1. Does the issuance of the 1099 mean that the debt is forgiven, or can the bank still pursue a deficiency judgement?

2. How do we deal with the FMV. Should we get an appraisal on our own? If so, which FMV should we submit for our taxes?

Thanks,

Chip

FEB

2010

Hi, we short saled our home in Oct. 2009. The closing date was Oct. 2009 and money was received by the lender for the short sale. I called about the 1099-C and the lender stated that we wouldn't get one until 2011 (for 2010) because the paperwork wasn't completely processed until Feb. 2010. Do I just wait and report this on our 2010 taxes?

SEP

2010

I live in Michigan. My house went through a sheriff auction last month and my bank bid the full amount due on the loan including late payments. If I understand correctly, this full bid amount will be the FMV for tax purposes? The amount due on the loan minus the FMV will equal 0. Therefore will there be no concellation of debt and no 1099c? Even though in reality the house is worth far less than what I owe on it?

Also, for insolvency purposes, if $70,00 is cancelled, (we are in the redemption period and still trying to negotiate a short sale), do we need to be insolvent by at least $70,000? If we are inslovent by say $30,000, will we owe taxes on $40,000?

And last, we took a cash out refinance, many years ago. Most was spent on home improvements. Do we have to show itemized receipts for home improvements to be exempt from COD under the mortgage debt relief act?

If all else fails, the most we can owe taxes on will be the difference between the originating loan and the price that was paid for the home at the foreclosure auction?

Thanks,

In a Pickle in Michigan

Dear Pickle -

You may be in pretty good shape. If the bid was the full amount of the judgment, then as to that loan you have no deficiency.

The rest of your questions are moot because of the full bid on the first mortgage. But I will answer them because others often have the same questions.

Your calculation for the insolvency issue is correct. The amount of your negative insolvency is a direct reduction of the forgiven debt. If your insolvency is less than the forgiven debt, then the difference is taxable.

Having receipts is the best way to show the cost of the improvements. Cancelled checks also work, or bills and estimates, or even permits that have an improvement value. Must is a big word. But if you don't the burden is on you to show that you did the improvement and what it cost.

Thank you so much for your help, I really appreciate it, I have spent hours and hours trying to figure this all out. We had a short sale offer on our home but the bank refused to postpone the sheriff sale while the offer was pending. They did end up approving the sale but the buyers backed out the day the approval came though. My agent wants me to continue to try to do another short sale during the six month redemption period but it seems like that is just going to put me back on the hook for tax liability and deficiency liability.

Thanks again,

In a Pickle in Michigan

MAR

I short sold a home in West Palm Beach Fl. I had a second mortgage of approx 50K. The 1st mortgage agreed in writing not pursue deficiency judgement. The 1st mortgage paid approx 4K to the second to release the lien. At closing, they had me sign a promisary note to repay the balance of the second. Both mortgages were with Wells Fargo. Shortly after the sale, Wells Fargo issued a Satisfaction/Release of Mortgage on the second! Not on the 1st mortgage. Once I saw the Satisfaction/Release, I figured they changed their mind & I would get a 1099. Then a month and half goes by and I am served a papeer for a lawsuit for deficiency on the second. I answered in writing to the bank & the attorney that since a satisfaction/release of mrtgage was issue, that I thought it was over. Looking back, I think the bank meant to issue the satisfaction/release for the 1st, not the second. But at this point, what are my option? Also, is the bank going to be required to issue a 1099 when the satisfied & released a mortgage for less than what was owed?

MAR

Rene -

First, you need to realize that a satsifaction of a mortgage is not always a satisfaction of a note. Read my article MORTGAGE IS NOT AN OBLIGATION TO PAY - COMMON MISTAKEN ADVICE BY AGENTS .

Second, the lender should have issued a release or satisfaction of mortgage relative to both mortgages in order to clear title. Lenders don't follow through with the release documents very often and it is a chore to get them to do what the law requires. Your title closing agent should be pursuing the release document in order for them to close out their file.

Is it possible you did not understand what you were signing? Alternatively, we do have experieince with lenders suing on forgiven debt, and your situation may fit into that parameter.

If I ran my business like the banks run this part of their business, I would and should be out of business.

Seek the advice of a competent attorney familiar with these issues.

AUG

Richard,

This is ver VERY good stuff! Glad I found your BLOG. Keep those tidbits coming. I negotiate a lot of short sales here in California. So, some of the finer points may not apply here. However, very useful info. Quick clarification if I may. You say, "It doesn't take a tough negotiator to get the deal for non-reporting in writing from the lender - it takes knowing the law and the rules as well as or better than your adversary." in your last paragraph. My understanding of what your saying is that it may be possible for me to negotiate as part of the short sale approval - that the lender NOT send a 1099?

Thanks again! And really, I have seen a lot of BLOGs, and many from Attorney's, that are not really worth much. yours is full of good info!!

NOV

I was a second trust deed holder on a one year private investor note to a vacant residential lot. The borrower defaulted and I had to foreclose and took title of the property in Jan 2009. The first trust deed holder was a friend and a loan originator who convinced me to get in on the deal. He held the first note at 450,000.00, my second note was 120,000.00. I have been unable to sell this property due to the declining market and building challenges on the lot. The equity from my first deed is now gone and I have not paid last year’s property tax. Now the first trust deed holder wants to foreclose, or have me sign a deed in lieu of foreclosure. What are the tax consequences, of me signing a deed in lieu of foreclosure? As a private investor, is he required to file a 1099a? How does this affect my credit? Is there any way I can negotiate how the title transaction is reported to avoid having a deed in lieu on my credit history? There was never any signed agreement or debt obligation between me and the first trust deed holder. We had a verbal agreement that I was not going to be responsible for debt payments on his first note.

Kevin - You need to check in your jurisdiction, but for the law in the United States as I know it, if you don't sign the debt instrument you have no obligation to the holder of the debt instrument.

So, you foreclosed but did not assume any senior debt - your deed is subject to that debt.

Thus there is zero impact to your credit (except your financial statement is skinny by the $120,000 you lost) and the deed in lieu is a non-reportable event for your credit history since you have no financial obligation associated with it. You don't have to negotiate anything and you can offer the DIL to make their life easier and maybe they can pay you something for your cooperation.

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Richard Zaretsky, Florida Real Estate Attorney

West Palm Beach, FL

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Richard P. Zaretsky P.A. - Board Certified Real Estate Atty

Address: 1655 Palm Beach Lakes Blvd, Suite 900, West Palm Beach, Fl, 33401

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