A note from Paul Griz, CPA about Short Sales and Taxes

Whenever a debt of a taxpayer is forgiven by a lender, whether the debt is credit card debt, home mortgage debt, or other debt, the forgiven debt, i.e., debt relief, is generally taxable to the taxpayer.  With regard to short sales or foreclosures, if you have reached an agreement with your mortgage lender in which the lender has agreed to forgive your mortgage, you will be subject to income tax consequences.  The lender will typically issue either Form 1099-C “Cancellation of Debt” or Form 1099-A “Acquisition or Abandonment of Secured Property” in the year of the asset sale.  In other words, you should receive one of these forms from your prior lender in the year of the closing of your home.  At that point, the debt forgiveness is reported to the IRS as income.

Qualifying Exclusions

There is good news, however.  Code Section 108 and 1017 provide several exclusions from the recognition of this debt relief income on your tax return.  If you qualify for one of the exclusions, you still will need to reflect the information of Forms 1099-C or 1099-A on your income tax return, but the debt relief income will not be taxable to you.  Furthermore, if you qualify for relief and do not have to report the taxable income, you will need to file Form 982 with your income tax return.  Form 982 “Reduction of Tax Attributes Due to Discharge of Indebtedness” addresses the proper handling of the reduction as a result of the debt relief.  For example, if debt relief is not taxable to you because one of the exclusions, then certain tax attributes (for example, carryover losses, credits, cost basis, etc.) must be reduced to the extent of the debt relief.

Questions?

If you have any questions about the income tax consequences to short sales, foreclosures, or any debt cancellation, please call Paul Griz, CPA at 843-422-4100 or paulgrizcpa@gmail.com.  He has extensive experience and training in debt cancellation issues and the corresponding exclusions.  Paul will be able to provide the necessary guidance in these very complicated matters as a result of short sales and foreclosures.