Short Sale Conspiracy? OneWest Bank, IndyMac and the FDIC

Brian,

It almost seems like the bamking system is a criminal enterprise

Brian,

You seem to believe that the issuance of a 1099-C is an option on the part of the creditor; that is just not so.

When a creditor writes off/cancels a debt - they must issue a 1099C* - that is the IRS rule and it is not an option for the creditor. Tax consequences are dictated by the IRS and not the creditor and just because a creditor issues a 1099-C does not mean the seller has to pay taxes on the canceled amount - there are exceptions that should be observed.

On primary residence, the seller will receive a 1099C (C = Cancellation of Debt) but Congress passed a law on December 2007 that will absolve that 1099C amount (up to 2 Million Dollars) on the short sale seller of a primary residence. The seller does not have to pay income taxes on the difference between the acquisition costs of the home and the short sale amount...

Be aware that on refinanced mortgages where the seller took equity out of the home. They seller is responsible to pay taxes on the amount that he/she took out if it was not put back into the home on repairs/remodeling.

On investment properties the law mentioned above does not apply and the seller will be issued a 1099C and will have to pay ordinary income tax based on his/her tax rate on the difference between the loan amount and what the home sold for.

There is something called "insolvency", IRS form 982, that might help offset some of the "gains".

I always recommend that my sellers consult with a CPA or a Tax Attorney to examine their particular situation as I am NOT an attorney or CPA and the above is my opinion and not meant to be legal or tax advice.

*Instructions for Debtor

If a Federal Government agency, certain agencies connected with the Federal Government, financial institution, credit union, or an organization having a significant trade or business of lending money (such as a finance or credit card company) cancels or forgives a debt you owe of $600 or more, this form must be provided to you. Generally, if you are an individual, you must include all canceled amounts, even if less than $600, on the “Other income” line of Form 1040. If you are a corporation, partnership, or other entity, report the canceled debt on your tax return. See the tax return instructions.

However, some canceled debts are not includible, or fully includible, in your income, such as certain student loans, certain debts reduced by the seller after purchase, qualified farm debt, qualified real property business debt, qualified principal residence debt, or debts canceled in bankruptcy. See Pub. 4681. Do not report a canceled debt as income if you did not deduct it but would have been able to do so on your tax return if you had paid it. Also, do not include canceled debts in your income to the extent you were insolvent immediately before the cancellation of the debt. If you exclude a canceled debt from your income, file Form 982.

*http://www.irs.gov/pub/irs-pdf/f1099c.pdf