Here's what a blank form looks like. In a Short Sale or Foreclosure this is what the Lender might chose to file (a foreclosure might send you a 1099-A too).
Like any other 1099, one copy goes to the taxpayer (you) and another copy goes to the IRS.
(click to enlarge)
The most important box is
Box Number 2: Amount of Debt Canceled
This is not your loan balance. It's your loan balance, plus every single little nit picking fee the Lender can tack on. Add penalty and fees too!
In a Foreclosure, these fees and charges are pretty much left unchecked by anyone from the homeowner's side.
In a Short Sale, either the Listing Agent or a Negotiator can help negotiate a reduction of these charges. In fact everything in a Short Sale is negotiable including the very issuance of this 1099.
Remember, the Lender is reporting this to both you and the IRS as "income". While you may or may not fall under the protection of the Mortgage Forgiveness Debt Relief Act (HR 3648), there is also the State tax consequences to be considered.
When I hear homeowners who say they don't care about a short sale, "just let it go to foreclosure", because they are not going to gain anything from it - this is one of the first gains I think they don't see.
I can see that. If you didn't receive a 1099-C, because you completed a short sale and your Negotiator minimized Box 2 or negated the issuance of the 1099 all together, would you notice?
Maybe not.
But I can say, TurboTax (or your tax professional) would notice more if they didn't.
The Mortgage and Debt Forgiveness Act that President Bush recently signed into law has put a moratorium on 1099's for short sales in circumstances where the home is the primary residence and is not due to HELOC or home equity loans. Something to be aware of for your sellers to be sure!
Ron - It didn't put a moratorium on the issuance of the 1099, it just changed the way the IRS treats the income.
You bring up the Primary Residence and HELOC aspects - True!
It also has to be Purchase Money (sorry, no Refi's).
There are other exclusions that apply - always consult with your tax professional.
I did a short sale in 2006 and had to beg the lender to not issue a 1099-C. (Back then, I didn't know that I should not have been negotiation on my seller's behalf.) Finally, my seller had to bring money to the closing table in exchange for the lender not issuing a 1099-C for the loan difference and the BOATLOAD of fees.
Bottom line is, sellers are not getting off freely and in many cases shouldn't. Short sale has been billed on the internet as the perfect cure-all. It's not. It's a long, tedious, tiring, emotional, and frustrating process.
Personally, I hate short sales. Can you tell?
I think we all can Karen. LOL
Thank you for providing this information! I need to pass this along to one of my listings ASAP!
Mike, good information for those on the fence trying to decide whether or not to just send the keys in to the Lender. Very good points and something that hopefully will drive home the point.
All these things are just so scary and hopefully I can steer clear of them.
Lisa - Thanks for the visit (and nice video today)
Gena - I seem to be on a "don't walk away" roll. Today's post has another compelling argument against walking away.
BAAAAAAA!
Gene - Hopefully you can.