Might Have Lost a SS Deal b/c of 1099 Issue

Has anyone had that happen to them? Is there a “magical pill” that you share with a homeowner regarding the potential of a 1099? I’m starting to run into this issue quite a bit, especially after the homeowners go through the HUD counseling.

I saw that the IRS has a hardship program - same concept as a short sale, but for taxes. I’m trying to craft a way to tell people about it w/o giving tax advice - e.g., ask a tax professional about the program.

Assuming they are facing foreclosure, tell them they are looking at potential cancellation of debt and a 1099 either way. See http://www.irs.gov/faqs/faq4-4.html

I know a couple of investors performing a large number of short sales that include a statement in their short sale packages (not the sales contract as this is between the seller & you) something similar to: “Lender or lienholder approving a discount on a mortgage on this property agrees payment has been made in full and waives any future right to a deficiency judgement or the issuance on a 1099 against the original mortgagor”. Any others using similar verbage? Mark.

I’m new to this. I’m a mtg broker, so when I hear 1099, I think personal income report for self-employed persons.

What is this 1099?

What is the consequence to each party if it is issued?


swgprop: Thanks for the info. The following is from


"Form 1099-C. If a Federal Government agency, financial institution, or credit union cancels or forgives a debt you owe of $600 or more, you will receive a Form 1099-C, Cancellation of Debt. The amount of the canceled debt is shown in box 2. "

This tells me that into to complete the tax return correctly, you must receive the 1099-C from the lender. I don’t see how there would be “income” to the seller if the lender does not send this form.

"Mortgage relief upon sale or other disposition. If you are personally liable for a mortgage (recourse debt), and you are relieved of the mortgage when you dispose of the property, you may realize gain or loss up to the fair market value of the property. To the extent the mortgage discharge exceeds the fair market value of the property, it is income from discharge of indebtedness unless it qualifies for exclusion under Excluded debt, later. Report any income from discharge of indebtedness on nonbusiness debt that does not qualify for exclusion as other income on Form 1040, line 21. "

This seems to tell me that if the Seller owes more than the house is worth, the short sale is income to the Seller based on the FMV. If they owe less than the FMV of the house (i.e., ARV), and there is a SS for less than what they owe, perhaps this is not considered income to the Seller, but a loss, b/c the Seller was unable to get FMV.


IRS publication #544 is also refenced in the doc swg linked.


The IRS has a program called Offer in Compromise. It appears this program covers the economic hardship aspects of paying taxes on income from forgiven debt. It also appears to cover challenging the 1099 issued by the lender, i.e., FMV. See the link:


Again, a tax professional (which I’m not one) should be able to help with that.

A homeowner facing “income” from the partial forgiveness of debt created by a short sale can avoid paying taxes on that income if they are insolvent.

You have to figure that any homeowner involved in a short sale is probably insolvent, otherwise the lender would not provide the partial forgiveness of debt.

Here’s an update: The owner is trying to reinstate the loan via a forbearance to the tune of approx $3K & increased monthly payments. They’re waiting on paperwork from CW & are trying to get it done b-4 foreclosure next week. If it’s not done by the foreclosure date, then…