In a Short Sale, in order to be in compliance with the IRS, the lender must send a Form 1099C (Cancellation of Debt) to the borrower for the difference of what was owed and what the house sold for. If, by law, they have the send a Form 1099C, then how can there be a deficiency judgment if it’s a cancellation of debt? Both can’t happen at the same time. Most loss mitigation reps will no idea how to counter this question! Don’t let them threaten you and/or your client with a deficiency judgment!
Michael Spickes
[b]We are stating that the 1099C and the deficiency judgment are two separate issues. Yes, the difference owed is considered taxable income, not tax owed. We have a CPA on board our team with 12 years of public accounting experience and have verified that in order to be in compliance with the IRS, lenders must submit a 1099C (Cancellation of Debt) to the borrower who did the short sale. Now, we have found that maybe 50% of the lenders actually do this. More power to them.
Since the lender is required by the IRS to send the 1099C form to the ex-borrower, this overrides any other ability to recover any of the difference owed (i.e. a deficiency judgment) because the 1099C is reflecting a “forgiveness of debt”. If the debt is forgiven, then the lender cannot come after the borrower with a deficiency judgment. Make sense? This is a great comeback to have when a loss mitigation rep threatens you and your client with a deficiency judgment. Loss mitigation reps won’t quite know how to respond.
Michael Spickes[/b]