Receiving 1099-C in a successful Connecticut short sale
In a short sale, a home is sold for less than the balance of the mortgage, with the lender agreeing to a short payoff. So, what happens to that remaining balance?
The goal of the short sale is of course to have the remaining balance forgiven by the lender - a goal we accomplish about 99% of the time. While that means the homeowner won’t be on the hook for paying the debt back, there is still a tax consequence in the form of a 1099-C.
In the eyes of the IRS, if a debt is canceled, forgiven or discharged, this amount is to be included in your gross income, and you must pay taxes on this “income,” unless you qualify for an exclusion or exception.
Creditors who forgive $600 or more are required to file Form 1099-C with the IRS.
So for example:
You owed $250,000 on your mortgage
Your lender received $200,000 in an approved short sale, with the lender forgiving $50,000
At the end of the year you receive a 1099-C for $50,000
This does not mean you have to pay $50,000!
What it does mean is you would need to include this $50,000 as taxable income on your return, unless you qualify for an exclusion.
There are exclusions that you may or may not qualify for depending on your situation (most commonly insolvency), however if a short sale is in your future, a talk with an accountant to understand your tax liability and exclusion options is most definitely in order!