Many homeowners that want to short sale their properties are misinformed, thinking that they can not escape the 1099-C tax, and must pay the Internal Revenue Service a capital gains tax on the forgiven debt, under a 1099-C (C stands for cancellation of debt). The 1099-C is a form required by the Internal Revenue Services and prepared by the lender or creditor who forgives a portion of debt, be it under a mortgage, credit card or other type of loan. Borrowers receive the 1099 C and must report them in the tax return the following year.
In a short sale, the very essence of a short sale entails a short payoff, or cancellation of debt. Since the mortgage lender agrees to accept a sum less than what is owed on the mortgage, it is agreeing to cancel a portion of its debt. Therefore, it is required to file a 1099-C with the Internal Revenue Service, and copy to Borrower, to advise that a portion of debt has been cancelled. The borrower is then obligated to file that 1099 C with their income tax the following year and report the cancellation.
The Confusion and misinformation that most homeowners have is that the 1099 C is inescapable and a necessary part of the short sale. They are under the mistaken belief that each and every short sale comes with a catch. The debt is forgiven, but monies are owed the Internal Revenue Service.
THIS IS FALSE. LET ME REPEAT THAT. THIS IS FALSE AND INACCURATE
Borrowers whose short sales are primary residences (and that also is open for interpretation) are not required to pay any tax to the Internal Revenue Service. While they will receive a 1099-C, under the Mortgage Debt Relief Act of 2007, they are exempt from having to pay any tax to the Internal Revenue Service. The Mortgage Debt Relief Act of 2007, which extended relief on short sales through December 31, 2013, states that homeowners whose balances are written off in a short sale do not have to pay any taxes to the IRS due to the cancellation of debt.
And this is not a guessing game. The law is very clear and on the Mortgage Debt Relief Act website, on the Internal Revenue website and many times, the short sale approval letter will state so.
My best advice when venturing into a short sale, is to hire the services of a qualified and knowledgeable attorney/accountant to negotiate the short sale for you in order to make sure, prior to entering into the short sale, that you will be exempt from having to pay anything. Moreover, you may be eligible to receive up to $30,000.00 from your lender, as a short sale incentive and for moving expenses.” Jacqueline A. Salcines, Esq., Attorney and Accountant.
At the Law Offices of Jacqueline A. Salcines, PA, we have an entire team of short sale negotiators, headed by attorney Salcines herself, who is both an accountant and a real estate lawyer. We work day in and day out to get the short sale approved on the best terms possible for the homeowner borrower.
Hiring a realtor or negotiator that is not familiar with IRS rules or regulations, is not familiar with the law and most importantly can not charge you to negotiate your short sale up front, therefore reducing incentives to work on it, makes no sense when so much is at stake. Particularly, since the 1099 protection is set to expire on December 31, 2013 unless extended by Congress.
Call me for a free, no obligation consultation to see whether a short sale is right for you.
We find the best possible solution to your loan problems, including loan modifications, short sale, deed in lieu, or perhaps even a settlement of the loan.
The Law Offices of Jacqueline A. Salcines, PA
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