If you are considering a real estate short sale of your home, you
should be aware that you may receive a form 1099-C for the amount of
the
lender's losses. This is considered loan forgiveness in the eyes of
the
IRS.
If you have other assets such as saving and you are not insolvent, you
may end up being responsible to pay ordinary taxes on the amount of
the
1099-C.
If you settle a debt with a creditor for less than the full amount
owed,
you may be required to report this forgiven debt as regular income,
with
certain important exceptions. The forgiven debts include money owed
after foreclosure or property repossession or credit accounts that you
don't pay. There are exceptions noted below.
If a lender forgives or writes off $600 or more of a debt's principal
(the amount not including interest or fees) must send you and the IRS a
Form 1099-C at the end of the year. When you file your tax return for
the tax year in which your debt was written off, the IRS will require
that you report the amount on the form as income.
While you may not have received this form from the creditor, the
creditor may have submitted one to the IRS anyway. If you don’t list
the
income on your tax return and the IRS has the information of the
transaction on file, you could get a tax bill or, worse, an audit
notice. This could end up costing you more than just the original tax
bill.
There are several exceptions stated in the Internal Revenue Code. For
example, you do not have to report the income on your tax return if
the
write off of the debt is intended as a gift, you discharge the debt in
bankruptcy, or you were insolvent before the creditor agreed to settle
or write off the debt. You should consult a qualified tax and legal
counsel to see if these circumstances apply.
If you are considering a real estate short sale of your home, you
should be aware that you may receive a form 1099-C for the amount of
the
lender's losses. This is considered loan forgiveness in the eyes of
the
IRS.
