Isn’t the short sale lender obligated to report canceled debt to the IRS? Isn’t the borrower obligated to report canceled debt even if they didn’t get a 1099-c?
In a short sale, the lender allows the house to sell for less than owed. The short sale acceptance letter usually specifies if the shortage is forgiven or if the lender reserves the right to pursue the borrower for the deficiency.
The vast majority of short sales I have negotiated for clients in Louisville KY result in full and final forgiveness of the shortage. The lender issues the borrower a form 1099-C. The “C” stands for cancellation of debt. Copies of the 1099-c goes to the IRS and to the borrower. The canceled debt may become taxable income, depending on circumstances and exemptions that the borrower may be entitled to, to be verified upon consultation with a CPA or tax attorney.
Now Here Are The Big Questions
Occasionally I read about Realtors, short sale negotiators or lawyers who negotiated with the short sale lender to not issue the 1099-c to the borrower. I have two questions:
1. Isn't the lender obligated to report to the IRS and to the borrower the amount of the canceled debt? How can this be negotiated between lender and borrower?
2. Even if the borrower does not receive the 1099-c, if he knows that the debt was forgiven doesn't the borrower have an obligation to report the canceled debt?
Doesn’t the borrower have to report canceled debt whether or not a 1099-c was received?
I am not disputing the validity of the claim that the 1099-c issuance can be negotiated. I am trying to clarify my own understanding. This clarification may also be beneficial to other professionals helping borrowers avoid foreclosure by way of a short sale.
All comments, whether dissenting or agreement, are welcome.