In a short sale, a home is sold for less than the balance of the mortgage, with the lender (ideally) agreeing to forgive the remaining debt. This forgiven debt creates a taxable event.
Receiving 1099-C in a successful Connecticut short sale
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.
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, the most common being insolvency. 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!
Last Updated on October 13, 2023 by Minna Reid
I am in a terrible DV situation. The other seller, primary loan owner stopped paying the mortgage only 4 months after we signed on the line together. I am the second owner on the VA loan (his VA loan) I tried, but could not financially sustain the mortgage alone and he refused to pay a dime. I have a friend working to still try a short sale but he has been living in the home for free now for 8 full months, soon to be 9. The bank accepted the short sale. Since this man is unemployed but has a retired military income with SS, and I work 2 jobs and have vehicles, Will they come after me to pay a majority of the 1099 they will send us? Say $50,000? How do they decide who claims that money. I have been unsafe in that home and have a current restraining order because it is so bad and can't financially afford that home and a place for my children. I just am curious if they will come after me because I HAVE the assets, I just happen to work really hard as a nurse practitioner. IF he doesn't have to pay that back I feel like I shouldn't accept the short sale and then just let it foreclose. OR do they ever go after the primary owner whose loan it is?
Not sure what state you are in, but if it is a deficiency state foreclosure leads to a much bigger debt than a short sale. Anyhow, VA loans work a little bit differently. VA does not actually forgive the debt. VA will reduce his entitlement by the amount of the loss until he repays it, so there will be no 1099 for you to worry about. However if you are also entitled to VA home loans, they will also be reduced by that same amount.