After the short sales comes Form 1099C - Cancellation of Debt. A lender who cancels a debt will file a 1099C with the IRS. This form reports the amount of debt that was cancel. And, according to IRS instructions accompanying the form, the debtor must include all canceled amounts on the "Other Income" line of Form 1040.
Furthermore, if the debtor was foreclosed upon, a creditor may be required to file Form 1099A - Acquisition or Abandonment of Secured Property. On the 1099A, the Creditor reports the Fair Market Value of the property in additional to any outstanding principal balance.
Sellers finding themselves in short sale or foreclosure situations may want to refer to IRS Publication 523 - Selling Your Home for tax information.
On December 20, 2007 President Bush signed into law HR 3648 - Mortgage Forgiveness Debt Relief Act of 2007 and to quote The President - to help "by ensuring that refinancing a mortgage does not result in a higher tax bill. Under current law, if the value of your house declines and your bank or lender forgives a portion of your mortgage, the tax code treats the amount forgiven as money that can be taxed." The President went on to say "...this bill will create a three-year window for homeowners to refinance their mortgage and pay no taxes on any debt forgiveness that they receive." (Note 1).
According to Robert Dietz, an economicst for the National Association of Home Builders ("NAHB"), "The Internal Revenue Service treats all debt amounts that are reduced, forgiven or eliminated as part of a mortgage restructuring or foreclosure as taxable income ..." (Note 2) (Note 3)
What remains unclear is when a seller sells their home and it sells for less than they owe on their mortgage and the lender forgives the outstanding balance of the loan, will the seller have a taxable consequence? The question is open because HR 3648 seems only to address "refinancing" and does not appear to address when sellers sell and the loan is discharged.
In any event, IRS tax code is very complicated, when and if a 1099 will be filled with the IRS should be clarified by the debtor as they complete the short sale negotiations with the lender.
Will the Cancellation of Debt be reported to the credit bureaus? My research indicates "yes". According to Maxine Sweet, Vice President of Public Education, she states "In the vast majority of instances ... a short sales is reported as 'settled' ..." and "... like charged off accounts, are very negative, particularly because a mortgage is involved." (Note 4)
So, if you are serious about buying or selling a home in today's real estate market, for a no-obligation confidential and professional consultation contact Stephen Howell, Associate Broker, REALTOR®, Coldwell Banker Residential Brokerage, 410-923-3217.
Notice: This information is provided for informational proposes only and is not intended to provide tax advice. You should seek tax advice from your attorney or qualified tax professional.
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