I’ve been hearing conflicting stories on the 1099 the homeowners get at the end of the year.
QUESTION: Will I have to pay taxes on the loss the bank takes, since the IRS sees it as a gain?
Findings: Apparently with the exception of 2007-2009 is the “window of opportunity” and homeowners will NOT have to pay taxes on the shorted amount.
HELP!!!
From all the seminars where I’ve heard about Short-sales, I’ve heard that it might, maybe, could, happen. That oftentimes gets followed up with a “but I’ve never seen it happen”. Could be true. However, my most recent completed short-sale, they said that they will issue a 1099. Lovely. The 1099 will get reported as income. It won’t be a bill; it’s income. It will get factored down thru your/the tax return and, depending on your tax bracket, is how much you’ll pay on taxes. Consult a tax attorney, consultant, CPA to verify.
On the most recent short-sale that I’m currently working, they said that by law they have to submit a 1099. This short-sale is non-owner occupied. The lawyer that I discussed it with verified that non-owner occupied properties will about 99.99% of the time get a 1099. Verify this with your own attorney. Plus, non-owner occupied properties can’t be included in the “window of opportunity” that you’ve heard about. Again, verify with your own attorney.
That being said, look at the choices available. One could ignore the pending foreclosure entirely and they will get a 1099 for the ENTIRE amount of the loan. If the lender is mad enough, they could forgo the 1099 and pursue a deficiency judgement. Argueably worse than a 1099 since you can attach a judgement to things like credit, vehicles, future real-estate in addition to garnishment of bank accounts, wages and tax refunds. Or, the homeowners could work a short-sale and get a 1099 for the difference between the mortgage amount and the final sales price. That’s what I’ve told the clients I’ve worked with. With that, some have moved forward, some have decided to just let it go. You should verify this with your attorney and advise that your clients do the same.
Going back to the “window of opportunity” you mentioned, it’s probably The Mortgage Forgiveness Debt Relief Act of 2007. The IRS explains: http://www.irs.gov/newsroom/article/0,,id=174034,00.html The biggest problem with that is that the homeowners must prove that they were illiquid. Otherwords, that by their best efforts, they wouldn’t have been able to sell everything they owned to pay off the debts. Basically, they have to prove to the IRS that they could have filed a legitimate bankruptcy. Doing the paperwork for a bankruptcy is even more fun than for a short-sale. You have been warned :twisted . The one that gets the final word in things like proof, illiquid, best efforts, legitimate, is the IRS.
Did I state that I’m not an attorney, tax consultant nor a CPA, and that that you should verify all this with your own attorney and your clients should do the same with theirs? Good, I did.
Dean
If you have an investment property you will get a 1099.
If you are “legally insolvent” at the time of the short sale the IRS will waive the 1099.
A good accountant with Turbo Tax software can spit out the needed paperwork in about 90 seconds.
I had done some short sales and in the event a 1099 is released, there are many ways how to convince the IRS to forgive this phathom income. If someone needs to get some help, please contact me. I have the best CPA to handle these situations.
Thanks,