After doing some digging around on the internet this morning, I came across a new form that will be included in all my Short Sale presentations from now on. I might turn this into something they have to sign acknowledging that they received information regarding their tax liabilities doing a short sale.
1099C -Cancellation of Debt
If you do not know what this is about you MUST learn. 1099C is the form that the lender is REQUIRED to turn in to the IRS when they cancel debt on a mortgage in a short sale. This is also referred to as "Unearned Income Tax" The IRS will tax the borrower on the amount of loss the lender takes in the sale of their home.
Sales Price $100,000
Seller Closing Cost Est. $ 7,500
Net to lender $92,500
Payoff to lender $125,000
Deficient Balance $32,500
The lender will turn in a 1099C to the IRS for $32,500! That means the seller will be responsible to pay tax on this dollar amount!!
Deficient Balance (unearned income) $32,500
Made up tax rate x 15%
Tax due by BROKE seller $4,875
Talk about getting kicked while you are down! Please make sure your clients understand the tax consequences of doing a short sale.
Also, there is current legislation out trying to change the tax law to eliminate the 1099C for short sales! Let you congressman know you support this bill.