SELLERS ALWAYS HAVE INCOME FROM A SHORT SALE / DIL / AND MAYBE A FORECLOSURE

By
Real Estate Attorney with THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY
https://activerain.com/droplet/LF8

CANCELLATION OF DEBT INCOME - WHAT IF THERE IS NO 1099?

When DON'T you have to report forgiven debt as income?

One of the biggest issues that potential short sellers and those in foreclosure ask me is whether they have to get a 1099 for any forgiven debt from their lender.  Without a single exception so far, every debtor (borrower) has assumed that if they can avoid a report from their lender that they are being forgiven a portion of the mortgage debt, they will not have to report any income nor pay any income tax on that forgiven debt.

While it is true that a lender need not report cancellation of debt (see 1099 Reporting - It's the Law), whether or not a lender reports forgiven or canceled debt is not the trigger for the obligation of the taxpayer to include that forgiven debt on his or her income tax return in the year the debt was forgiven.

A taxpayer has two opportunities to avoid the inclusion of the forgiven debt and thus the payment of income tax on that forgiven debt:

            1.  The 2007 Mortgage Forgiveness Debt Relief Act provides non-recognitionof the income otherwise recognized as includable in income of the taxpayer for forgiven or cancelled debt.  It is only available for the amount of the original mortgage shortage after a sale on a principal residence - which is a home that is the primary home of the taxpayer for the previous 2 years prior to the short sale or debt forgiveness.

            2.  Non-recognition of income can also be achieved when immediately before the short sale (and forgiveness of the debt), the taxpayer is "insolvent".  This is an interesting definition and there are several articles and court cases on how insolvency is measured, what assets should be included and what liabilities included in the calculation.  Generally,

IRC Sec. 108(a)(1)(B) provides that gross income does not include any amount which would be includable in gross income by reason of the discharge of indebtedness of the taxpayer if the discharge occurs when the taxpayer is insolvent.  Although that provision of the IRC may exclude from gross income the gain from a discharge of indebtedness for taxpayers that are insolvent, IRC Sec. 108(a)(3) limits the excludable portion to the amount by which the taxpayer is insolvent. For example, if a taxpayer owns assets with a fair market value of $100,000 and has liabilities of $125,000, only $25,000 (the amount by which he is insolvent) can be excluded if the liabilities were forgiven.  Therefore, the calculation of insolvency becomes very important.

Anyone contemplating a foreclosure, short sale, deed in lieu of foreclosure, or bankruptcy needs to become familiar with this situation! 

There is more to understand.  According to Michael Lampert, a Florida Board Certified Tax Attorney, a taxpayer should properly report that the forgiveness income was received (and this generally is limited to loans provided by persons or entities in the business of making loans - but not necessarily loans amongst family members) and then submit the schedule for non-recognition of that income (on Form 982 from the IRS) with his or her annual 1040 income tax return. He says that generally, the IRS can question that schedule for 3 years from filing.  If you don't include the income or if you understate the income, then the IRS can go back 6 years before the statute of limitations runs out.  Various events can extend that time, so anyone utilizing this route must consult with a competent tax advisor, according to Mr. Lampert. 

THIS ARTICLE SHOULD NOT BE RELIED UPON FOR TAX ADVICE.  SEEK THE ADVICE OF YOUR TAX PROFESSIONAL TO DETERMINE THE CURRENT LAW AND HOW YOUR PARTICULAR SITUATION MIGHT BE AFFECTED.

Copyright 2008 Richard P. Zaretsky, Esq.

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  New Website www.Florida-Counsel.com

See our easy to understand articles at:

TABLE OF CONTENTS - SHORT SALE AND LOAN MODIFICATION ARTICLES

close

Re-Blogged 1 time:

Re-Blogged By Re-Blogged At
Topic:
ActiveRain Community
Location:
Florida
Groups:
Realtors®
Short Sales and Forclosures ONLY
Florida Realtor® Network
Short Sale REALTORS®
PALM BEACH COUNTY SHORT SALES
Tags:
irs
lawyer
1099
florida
deficiency
short sale attorney
mortgage forgiveness
forgiven debt
short sale income
short sale income tax

Post a Comment
Spam prevention
Spam prevention
Show All Comments
Anonymous
Anonymous

Thanks for your reply.  The property I want to walk away from is located in Florida. If I walk away what happens with the 2nd on the home?  Also, here's some additional information:  I have a home with a 1st and 2nd mortgage, as I stated above. I'm upside down on the loan. For reasons explained above, I'm still thinking seriously of walking away and/or mailing the keys to the mortgage company.  I'm a disabled veteran and receive disability and I also received social security and a retirement income income from the military. Over half on this income goes towards the 1st and 2nd mortgage. My mom has a place I can move into and I have a townhouse in another state that my daughter lives in.. that mortgage is adjustable too as well as on my primary home I'm in now.  I was thinking of deeding the house in the other state to my daughter.  My question is: can the bank seek recourse on my disability pay and/or my retirement income?  I was told they cannot touch my disability pay, but I don't want the bank touching my retirement pay either.. which is only about $900...and can they touch my assets like my car and furniture and the home out of state if it's deeded to my daughter? I'm 57 yrs old, this, all this stress, is effecting my health even more.  I don't want to keep living month to month and want to be free of this house.  I really don't want to do a short sale.  Since I can't do a deed in lieu because of the 2nd mortgage, which is fixed, I just want out.  Doing so will save me $14,000 a year, my santity and health.  I keep hold, but I'll loose the house anyway in the end, when I'm 80 and the mortgage ballons.  No one will refinance, because of the value of the home, and late on some other bills.  Credit score is about less than 520.  Thank you in advance for your reply.

Dec 13, 2008 02:04 AM #30
Anonymous
Anonymous

Since my last post, as of yesterday, I've went ahead with a realtor to do a short sale.  He's listing the property for $179,000.  However I owed $250000, which includes $47,000 on a 2nd mortgage.  If the 1st agrees, I'll be negative to that lender for $71,000, plus the $47,000 on the 2nd.  That's $118,000.  $179,000 is not enough I feel to satisfy both companies, so what happens now.  I know I'll probably get a 1099 from IRS; is there a form I can submit to IRS for forgiveness once this is over?  Also, my realtor told me to stop paying both mortgages.  He states, what for, because the mortgage company(ies) need to see I can't make the payment and would be more included to do the short sale.  Is this true?  Even if the house is up for a short sale, can't the mortgage company(ies) still go ahead with a foreclosure if I'm not making payments?  He stated that once the deals done (short sale), sign a promissary note saying I would pay, don't pay, and file bankruptcy.  Any advice?  I need it pretty quickly.  By the way, he says I don't pay them one penny, it's all paid by the mortgage company, ofcourse unless I cancel the deal, I'd then have to pay them $1000.00.  Another thing, I want to move, he said I can move anytime I want, I don't have to live here nor make any payments, again, on the mortgage, home insurance or anything.  Ofcourse, the insurance is included (escrowed) into the mortgage payment.  Am I doing this in the right order?  Thanks again for your quick responses.

Dec 19, 2008 12:31 AM #31
Rainer
32,233
Sidney Jimenez
Keller Williams - Miramar, FL
CDPE, Short Sale Expert, 954-665-9449,

Hi there! I wanted to give you my opinion on the situation you seem to be in.

1-You shouldn't take the advice of anyone about missing your mortgage payments without first knowing if that is a necessary step to take. Have you spoken with your lender about the possibility of doing a Short Sale? Some lenders do require that the mortgage be behind before they would consider a Short Sale but other lenders don't have that requirement. It is also possible that your lender would be open to forgo that requirement depending on your hardship. It can be made quite evident that you may not have missed any payments but your current situation dictates the probability of that happening quite soon. Missing payments on your mortgage will affect your credit and any other debt you may have. Talk to your lender and try to get them to forgo that requirement, if they even have it.

2-Don't worry about how much the lenders will get as a result of the sale. What you owe is irrelevant as long as you can get a good contract close to the current market value in your area. Whomever is negotiating with your lenders should start negotiating with the first lender and not offer them anything more than $3,000 as a settlement. Try not to negotiate and come to an agreement with the first lien holder because the 2nd will have more leverage and could demand a better payout to them.

3-It is a possibility that one of the lien holders will ask for a promissory note, but that is also a negotiated item and it can be eliminated. It should not be an automatic assumption that there will be a promissory note attached to any settlement. Again, it is a possibility but it shouldn't be a foregone conclusion.

4-Anytime the possibilty of a bankruptcy comes into the conversation you should speak with a qualifed lawyer and your accountant.

5-You deserve the right to cancel you agreement without having to pay for services you might not be happy with. The outcome of this situation could follow you for a long time and you should have the right to chose someone that will give you the best chance to succeed. You might not have the person if you don't feel confident about the process you are beginning.

What part of Florida are you in?

Dec 19, 2008 02:37 AM #32
Anonymous
chris

I have a timeshare mortgage that I have falled behind on, and the timeshare company has offered me a DIL. I have already begun the process of completing the paperwork, but I am concerned about any possible tax consuquences. I still owe a hefty amount, $23,000+, although the paperwork has it written that my debt will then be forgiven. One more thing, I used to be a resident of the USA under a temporary work visa but has already left the US last year. Since I do not earn any money through the USA (or from any job whatsoever), I understand that I am not obligated to file any more tax returns for 2009. However, if this DIL thing with the timeshare pushes through, what should i expect? If the company does not submit a 1099, and if I ask them for paperwork to say that the debt is cancelled, will that mean I do not need to pay taxes for this? Please advice. Thank you. 

Mar 25, 2009 04:42 AM #33
Anonymous
Keri

We just sold our primary residence as a short sale.  The first got most of its principal just not all the fees. The second got $4000 and $1000from the buyer. We also have to sell our former primary residence which was rented for several years.  It has been vacant for 1 year. We will be doing a short sale on this one too. We are insolvent, tons of bills not much money. We are worried about the banks coming back for the remainder of the balances. If they submit a 1099 will that mean they are forgiving the balance? How does that part work?

Keri

Jun 06, 2009 01:16 PM #34
Rainmaker
280,033
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Keri - this is an often asked question and I know SOMEWHERE I already did an answer, but for the life of me I cannot find it.

The 1099C is information to the IRS that the reporting entity has cancelled (read, forgiven) debt owed by the identified person - that would be you.  It makes common sense that if you say you forgave debt, you indeed forgave debt.

A 1099C can, however, be retracted by filing an amended information report.  However doing so is not as easy as just doing it - there are questions to be asked and such reporting can act to prejudice or even harm the income earning person because he or she may have acted in reliance of the report.

So the answer is YES, but....

 

Jun 07, 2009 10:00 AM #35
Anonymous
keri

So if they submit a 1099c next year and we pay the taxes, etc. One should be covered by the homeowners relief...since it was our primary residence.  The other we will owe taxes. So do they have 5 yrs. to decide if they will retract the 1099c. We would then have to re do our taxes for this year?? So confused.

Keri

Jun 07, 2009 02:18 PM #36
Rainmaker
280,033
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

If you are exempted from the tax by the 2007 Mortgage Foreclosure Debt Relief Act, then it does not matter if it is a short sale forgiveness or a mortgage foreclosure without a deficiency judgment, regardless of there being a 1099C.  Remember, it is not the 1099C that is the trigger, it is the forgiveness.

Jun 19, 2009 11:03 AM #37
Anonymous
jenn

So in Keri's case, wouldn't her reported "income" from the forgiveness of her two homes be tax exempt; the first property because of 2007 MFD Relief Act and the 2nd simply because she is insolvent?  Seems to me if she remains insolvent for 5 years, which will most likely be the case anyway, then the lenders won't have much to recover out of her.  It seems to me, the 5 year right to retract forgiveness is something to protect lenders from fraudulent borrowers.  If the borrower is broke there is no money to be retracted. If the borrower has money, then they should pay to the degree that they are not insolvent--or suddenly "become" insolvent if skirting debt is their primary concern. I don't know. Maybe I'm missing something because it seems very black and white to me. 

We are considering short sale ourselves for all the same reasons as everyone else under the sun--however, the one thing I have heard you say over and over is that if there is "debt forgiveness," there is "income" to be reported. If there is no forgiveness, there is remaining debt to be paid. 

Can one be considered insolvent without going through the process of bankruptcy of some sort? Also, seems to me if someone is trying to avoid a retractment of "forgiveness" they should stay poor on paper for at least 6 years. Lay low. Live humbly and pay their dues for a season.  What a concept.

Aug 07, 2009 10:45 AM #38
Rainmaker
280,033
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Jenn -

The insolvency rule is not whether you can pay your bills - it is defined by the IRS as asset insolvency so to speak.  You take all your assets (include all real estate a CURRENT value - meaning as of the date of the sale of the property just sold and include IRA's, 401's, etc) and then from that asset total deduct all the debt - automobile loans, credit card balances, mortgages, student loans, just about all the money you owe.  If you come up with a negative number, then that negative number can be applied against the forgiven debt that is not otherwise excludable under the 2007 Act.

Hope this explanation helps..........

Aug 09, 2009 01:45 PM #39
Anonymous
Anonymous

Need clarification.

In order to qualify for CODI do I need to live and occupy the place for two out of five years, or it would be considered a primary residence just by the fact that the loan was acquired for a purchase of primary residence.

In my case, we lived and occupied the place for 30 months, but moved out and rented it for over 5 years now. Do we qulaify for CODI under the primary residence indebtiness rule?

Aug 11, 2009 04:06 PM #40
Rainmaker
280,033
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

You have to go under the IRS rules and definitions if you are looking to qualify for any IRS exemption relating to cancellation of debt income.  If you are out of the house for more than 5 years you cannot fit in the definition of having the residence as your primary home for 2 of the last 5 years, unless you have not had a primary home elsewhere (as in you are traveling and you have not given up the home as your primary residence - provable through various usual and customary incidence of having it as your primary residence (ie: address on your driver's license, etc.).  See IRC Regulations and Comments for more information on your particular set of facts.

Aug 11, 2009 10:00 PM #41
Anonymous
chris

I posted a comment here in March but it was left unanswered. It was about a timeshare in Florida that I had stopped paying. It was an in-house mortgage, and the timeshare company has offered me a DIL and I have then decided to push through with it. I have been living out of the United States the whole of 2009, and have not had any income from the United States (I am not a US citizen) except for interest at a savings account.

I want to know if I am supposed to get a 1099a, when do I expect to receive it, and if I will have any tax obligations in relation to this, given that I did not live in the US last year. I owed a little over $23,000 when I stopped paying. I do not want to have any troubles with the IRS as I am planning to return to the US this year for a new job contract. Should I contact the timeshare company regarding the 1099a?

Thank you and I hope to hear your advice on this matter.

chris

Jan 04, 2010 07:39 PM #42
Rainmaker
235,088
Vadim Zolotarevskiy
FunCoast Realty & Management, LLC - Daytona Beach Shores, FL

Chris,

It would be very unusual to expect the responce to the blog, that was posted more than a year and a half ago.

I think you can use the questons on ActiveRain, and because there are people who are looking to answer questions, you may have a better chance.

Also, you may think of talking to your accountant. They should be knowledgeable abobut it. Sorry, I am jumping on Richard's blog, but I do not think you will receive the answer, so I thought I would rather tell you that.

Jan 06, 2010 09:38 AM #43
Anonymous
Miriam

I am in a dilema and hope you can help me with this.  I divorced my ex in 2007 and he was awarded the primary residence.  I found out in 2009 that he stopped making payments on the property and that it was in forclosure proceedings.  After taking him to court, we sold the property on a short sale.  We were BOTH listed on the loan for the mortgage and a few weeks ago, I find out that I am the only one that was given a 1099-S.  I had not lived in the residence for 2 years because he was abusive, kicked me and our three children out and I ended up leaving and allowing him to live at the residence.  Why am I the only one receiving a 1099-S for the whole difference between the short sale? 

Feb 14, 2010 02:01 PM #44
Rainmaker
235,088
Vadim Zolotarevskiy
FunCoast Realty & Management, LLC - Daytona Beach Shores, FL

Miriam,

I am not sure Richard is checking his old posts. Most probably he did not see your comment, so if want, you can click on his profile page and send him an e-mail from there.

I am not an attorney, of course. However, if you have lived there for 2 years out of the last 5 (I think that is the requirement for the forgiveness of debt), you can still write it off if the difference did not exceed $250K for one person, and $500K for two.

Maybe it is not yet all that bad.

Feb 19, 2010 11:07 AM #45
Rainmaker
280,033
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Miriam

Sorry it took a while -

Don't be so sure you are the only one to get the 1099.  In any event, my thought is that once you got divorced you only had 1/2 of the asset and that too was awarded to the husband. At most your accountant would probably allocate one-half of the 1099 report to your tax return.

That being said, you may also be excused from paying taxes on the income under the 2007 Act which Chris and this article is all about.

Seek the advice of a tax professional 

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  New Website www.Florida-Counsel.com

See our easy to understand articles at:

TABLE OF CONTENTS - SHORT SALE AND LOAN MODIFICATION ARTICLES

Mar 04, 2010 11:25 PM #46
Rainmaker
34,902
Speed Equity® Mortgage Acceleration System
Speed Equity® - Olympia, WA
We help your clients Own Their Homes Years Sooner

Richard, not only am I learning from your blog post - but also from the great Q&As that you are patiently taking the time to answer. Thank you.

Aug 08, 2010 06:35 PM #47
Anonymous
K

Richard, What are your thoughts on this?

 

 

If you are issued a 1099C, one would think that the deficient amount is history and a DJ is out of the question, as the debt is being transferred as "income" to the homeowner. A reasonable assumption. However, according to Carolyn Secor, a Clearwater-based attorney who specializes in foreclosure defense and bankruptcy, the 2 are apples and oranges. A DJ is a civil litigation action and a 1099C is simply an IRS function. The 2, when held at arms length, are not truly related. HENCE, ONE CANNOT ASSUME THAT THE ISSUANCE OF A 1099C WILL PREVENT A DJ.

 

 

re Stephen M. Zilka, Debtor. Eric Bononi, Trustee of the Bankruptcy Estate of Stephen Zilka, Movant v. Bayer Employees Fed. Credit Union, Respondent. 

U.S. Bankruptcy Court, West. Dist. Pa.; 05-25205-MBM, July 16, 2009.

A creditor corporation's filing of Forms 1099-C, Cancellation of Debt, in response to its charging off of the outstanding indebtedness of loans to a debtor, was not the legal equivalent of, or a discharge of, the indebtedness, and did not serve as a discharge from further liability on any of its claims. Issuance of a Form 1099-C is not an admission by a creditor that it has discharged its debt. The sole purpose of issuing and filing a Form 1099-C is to satisfy an IRS information reporting requirement; it does not constitute a contractual agreement not to sue or a contractual renunciation of rights against a debtor.Permitting a corporation that had issued Forms 1099-C, Cancellation of Debt, to a debtor without dischariging the indebtedness to enforce its claims was not inequitable because the corporation did not necessarily take tax deductions with respect to such claims. Furthermore, even if it had benefited from such prior deductions, they would be automatically reversed when the corporation received a recovery from the debtor's bankruptcy estate.

 

http://section6694penalty.blogspot.com/2009/08/not-forgiveness-of-indebtedness.html

 

Nov 22, 2012 09:06 PM #48
Rainmaker
280,033
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

K -

This is consistent with most thought.

The failure of a 1099C to be issued does not make forgiven debt non-taxable.

Likewise the issuance of a 1099C is an indicia that the issuer intends to or has forgiven the debt, and as such the income must be reported on the debtor's tax return.

If the issuer later says that the 1099C was not a forgiveness of the debt, then it must seek to correct the report and depending on the actions taken by the debtor, may have some issues as a result of the inaccurate report.

What the decision is saying is consistent with practice - as the deficiency waiver is through a specific statement of such (satisfaction of mortgage, cancellation document or written undertaking not to enforce the deficiency, or running of the statute of limitations to enforce the debt).

So the issuance of a 1099C is but one indicator of a waiver of the deficiency.

Nov 22, 2012 11:38 PM #49
Post a Comment
Spam prevention
Show All Comments

What's the reason you're reporting this blog entry?

Are you sure you want to report this blog entry as spam?

Rainmaker
280,033

Richard Zaretsky

Florida Real Estate Attorney
Ask me a question
*
*
*
*
Spam prevention

Additional Information