handling the "forgiven" amount that may be taxed from a short sale

how do you guys go about working this out with the homeowner. it seems this may be a concern to the homeowner in which they are responsible for tax on the forgiven amount.


Give me a shout and I’ll tell you what MORE THAN LIKELY will happen, and how to deal with it.

Have had several tax clients this year with the problem.


I would like to hear any tips as well.
In my contract with the Homeowner, i had mentioned that
the contract is dependent on to the bank not pursuing a
default judgement.

The bank has signed off on the SS and we are ready to
close. Is there something i need to get from the back in
writing towards not enforcing the deficiency judgement?

Also the ways and means to handle the tax implications would
be a helpful tip.



If you get the bank to not do a deficiency judgement, then the sellers are going to get a 1099 at the end of the year. What is a better option for them, worry how to pay the taxes owed on that amount at the end of the year, or get a foreclosure on the credit?

Also, if the sellers have lived and owned the property for at least 2 out of the past 5 years, then under current tax law, any “profit” that they make on the sell of their property is not taxable ($250K single, $500K married). This would include a 1099 forgiveness of debt statement from a short sale.

If you’re terms are in the contract and the bank signs it, then it is binding.


oops, looks like I should have searched a little longer before I posted my own topic. ::slight_smile:

Raj, it is my understanding that the sellers CANNOT profit during a SS. So how is would this be applicable? I’m trying to understand. thanks!


This is an OPINION and some info as to some issues I dealt with clients’ tax problems this year.

It is up to the discretion of the lender as to filing a 1099. And there are two that can be filed. A 1099-A is for an abandonment of property. The 1099-C is for the Cancellation of Debt.

BOTH become income to the debtor for the amount that has either been cancelled or abandonded. Both of my clients had the properties go to foreclosure, and I don’t THINK there would be any difference it being a SS or a foreclosure. The reason I lean this way is because a SS is a REMEDY for the foreclosure.

ACCORDING TO MY OWNER/CPA, when a 1099 is issued, the amount will be income. I’ve had 1099-A issued and there is a box that has fair market value filled in by the lender. This amount subtracted from the loan balance is the amount of the income. IF no amount is in that box, then the total amount will be considered income.

One 1099-C was issued and both the boxes were filled in and the ex-owner was only taxed on the difference between the two amounts. I had a personal one that only the amount of the debt was filled in and the FMV box was not filled in, and I was liable for the entire amount that was deemed income.

The only disagreement I have with Roger would be the fact of the profit assessment. When a property goes into foreclosure, it looses its standing as a normal sale. This is my thinking beacuse the SS is the remedy that the lender CHOOSES to take to settle.

IF you can stall the foreclosure long enough, and sell the property to satisfy the mortgage, then there shouldn’t be any problem.

Krish may be right and I hope he/she is. Problem may be later when the 1099’s get issued at the end of the year, and the lender ACCIDENTLY forgets that part of the contract, and sends one out for the amount owed and then the fun really starts. You then have to PROVE to IRS that the 1099 is wrong.

Hope this helps and if any of our other tax guys will weigh in…


Kevin is correct, it is the lender’s choice to send the 1099.

The advice about the tax advantage for a homeowner came from my CPA. However, that’s just heresay for anyone else, so do your own checking. Don’t take my word for it. That said, a short sale is still a sale of the property. ANY 1099 received from that sale is still considered profit from that sale, regardless of it being actual income or a cancellation of debt. If the IRS considers it profit, then it falls under the current tax code.


So if fair market is greater than the forgiven amount, there’s no tax liability? That’s how I read what you wrote. It sounds like the key is to get the lender to put the FMV on the form and hopefully it’s bigger than the amount forgiven.

FMV has nothing to do with it. Profit is determined by how much money you make off of the sale (Sale price - loan = profit) or how much debt is forgiven (or cancelled). Both of these will be reported via a 1099 form that you’ll get at the end of the year, either from the bank or your closing agent.

If you had owned, and lived, in the property for at least 2 out of the last 5 years, then under the current tax code, any profit up to $250K for a single, or $500K for married, is not taxable income.

Anything over those amounts are taxed and if you don’t fall into the 2/5 years things (ie an investment sale) you are taxed.


I am new to this.
Someone on the board mentioned that if the HO files a form 982 while filing for taxes, the forgiven amount would not show as an income. Form 982 should be backed up by a Hardship letter and proof…

I have read the form 982 and it seems to be acceptable to IRS.

Since I have never done a short sale, I have to go by what experts think.

please comment…

Can anyone tell me about the tax implications for doing a deed in lieu? Will they still be 1099’d or again is it at the discretion of the bank?

I’m working on a short sale and homeowners were concerned about both a discrepancy judgements and a 1099.

The Solutions:
-We included in our contract that it was subject to the lender not pursuing a deficiency judgement.

-I found some info. that suggested that sometimes lenders issue 1099s and sometimes they don’t. So, I called the lender, Bank of America, and asked if a short sale were accepted on this particular property would a 1099 be issued. The loss mitigation dept said that because Fannie Mae is the investor on the loan, a 1099 would not be issued…that Fannie Mae for whatever reason, does not issue 1099s. Great News!

I suggest being direct with the Loss Mitigation Dept. They are usually motivated to try to work something out to avoid foreclosure. I even ask up front when I call for the packet, if they would be willing to consider a short sale on such-and-such property.

Good Luck!
C :slight_smile: