When you complete a short sale, if you get the deficency judgement waived will the bak always do a 1099.
Is that something they will always do?
What exactly is a 1099?
A 1099 is an IRS form most commonly used to report “income” earned by non-employees. For example a business would issue them to subcontractors to show what they paid them during the year. They are used to show earnings for independent contractors (such as real estate agents) and those in the direct sales industry (like Tupperware). They can also be used to report prizes won (for example you win a computer from a local radio station). The most common way to think of it is the W-2 for independent contractors.
As far as banks issuing them for short sales, I would think that each lender is different and you would need to ask that specific lender if they intend to do that or not.
So if the bank issued a 1099 to a homeowner, they would have to pay taxes on how much money the bank loss?
So if the house is worth 100k and the bank took 60k, they would issue the homeowner a 1099 for 40k.
Is that correct?
The way I understand it is if the outstanding loan was $100k and the bank got $60k, they can issue a 1099 for the remaining $40k.
The bank will always do 1 of 2 things, either give the seller a 1099 or file for a deficiency judgement. They can not do both. If you negotiate with the bank that they will not file for a deficiency judgement, which is normally acceptable, it will make your deal more appealing to the seller, in which case they will recieve the 1099.
What I’m asking will the seller have to pay back the 40k of will they have to pay taxes on the 40k ?
If they get a 1099, it’s the taxes on the $40k.
That’s what I was explaining. It will be one or the other. Obviously, the 1099 is preferred. Paying taxes on 40K is easier than the paying back the entire 40K, obviously. Many times people in this situation have other issues in life that may make the 1099 not really matter so much anyway. So, point being, if you want to make your job easier, you protect the seller by having the bank agree to not go after the 40K, in which case all that happens is they (probably) get the 1099.
Let me add that because of the tax law that grants homeowners a tax exemption for any “profit” received from a sell of a home that they have lived in and owned for at least 2 out of the last 5 years, even if they get a 1099, they may not have any taxes to pay.
Raj
About the 1099 and IRS taxes, since the taxes are requested by the IRS when there is “debt relief” (or a discount on a loan), why would it depend on the bank to issue or not issue it? In other words, why would the responsibility be on the bank to decide “I’ll issue a 1099 and they will owe taxes” or “I won’t issue a 1099 and they won’t owe taxes.” I don’t think the banks determine this. As far as a deficiency judgement, the banks do determine whether they will seek a def.judg or not.
It’s not a matter of “I will or I won’t” by the bank, it is a matter of “which one of the two will we do?”. Trust me, this is how it works. Try to understand it from the banks point of view - If they send a 1099, they are writing off the money, so the 1099 enables the bank to bring some money back via tax writeoff. If the bank does not send a 1099, they have the ability to go after a deficiency judgement in order to recoup some of their loss. They can’t do both or they would be double dipping.
Finally, of couse it is up to the bank what to do. These options are part of a business deal. The money the bank is losing is THEIR money, who else would have any right to determine how they deal with their cash loss?
So, Tex, the way you’re thinking about it would result in this: The mortgagee owes 150K, sell for 100K (that the mortgagor agrees to accept as short sale). Essentially, the seller saved 50K (=profit from a tax standpoint). If the bank issues a 1099, they are showing that they paid the seller that 50K, which gives the bank tax writeoff and costs the seller a tax payment. At that point the issue should be dead. If it is then still up to the bank to go after a def.judgment, the seller would be getting hit for a second time, and the bank would be recouping 50K that they just showed as a loss to the IRS. The bank would make out huge. Do you think the IRS would ever really allow that? Not a chance.
Tex,
In a simplier way of saying it. Unless the bank writes it off (and sends a 1099), then the amount is still considered due.
The 1099 is sent by the bank when an amount (over $500) is “excused” from payback. Until it is excused, it is still due from the mortgage payer (and hence not a relief).
I know of one case where a person sold his house as part of a short sale, and the bank delayed for several years before finally sending a 1099 and wiping clean the debt. In this case, the bank had an amount due of almost $25k. The accept 5k as payment in full, and sent a 1099 to her for the remaining $20k.
When talking to a seller, and trying to arrange this type of sale, it’s best to tell them they may get a 1099 from the bank, but that they can write-off up to 250k as long as they lived in the house 2 of the last 5 years.
A bank can write off a debt to the IRS before sending a 1099. If years later they collect it, they simply do a reverse entry in their general ledger as a profit entry (usually titled as “collections from amounts previously belived to be uncollectable”).
It makes much sense now… THANK YOU.
Where may I find more information on an individual not having to worry about “debt-relief” taxes (1099’d) if they have lived in the house for 2 of the last 5 years?? I know this applies when selling and determining capital gains but didn’t realize this applied also when a loan is settled for less on a short sale.
Do banks usually go after individuals (def. judgement) or take a write-off after they get the house back and sell it months later?