The IRS finally chimes in...and has finally attempted to clear the air about the 1099 issue. All that can be said is WOW!!
Let's all go get our short sale deals closed! The 1099
objection from homeowners in trouble is officially dead!

 

Now it's out in the open...We're going to be the first to say it and after you read the
information below I am sure you will agree! The IRS has attempted to clarify the 1099 issue
regarding short sales and cancellation of debt in a report issued on September 17, 2007.

The IRS urges borrowers to check the Form 1099-C carefully. They should notify the lender
immediately if any of the information shown on their form is incorrect. Borrowers should pay
particular attention to the amount of debt forgiven and the value listed for their home.

The IRS also reminds lenders of their obligation to provide accurate information on the Form
1099-C.

The dreaded 1099 is based in large part on the current "as-is" fair market value of the home.
Another VERY important calculation is the amount forgiven. The bank is not forgiving the
ENTIRE mortgage in a short sale. Remember, in a short sale, unlike a foreclosure auction or
REO, the bank is indeed receiving a large amount of cash. They are only forgiving a "portion" of
the debt. Not the entire mortgage.

The IRS urges homeowners to check the veracity of any 1099 that is issued particularly the
amount that the bank says is the value of the property. The IRS SPECIFICALLY states the
following to the mortgage lenders:

can not include any amount the lender receives in satisfaction of the debt by means of a
settlement agreement...

Here is how the IRS states a homeowner should determine what kind of potential liability they
could have in a short sale situation. Remember, this is the bank's responsibility to fill this
document out correctly.

Figuring Cancellation of Debt Income:

1. Enter the total amount of the debt cancelled:___________
2. Enter the fair market value of the property from Form 1099-C, box 7. ___________
3. Subtract line 2 from line 1.If less than zero, enter zero.___________

Bottom line if #3 is zero or below zero in the cases we are working then there is no
cancellation of debt income and as such no issue to be concerned about tax-wise on a short
sale! See for yourself below.

Let's look at a typical short sale example:
$250,000.00 mortgage balance on a house worth $220,000.00 (current "as-is" market value).
Bank agrees to a short sale and agrees to reduce their payoff down to $150,000.00. The
amount of debt forgiven is actually $100,000.00 not the entire $250,000.00. So the "gift" or
cancellation is actually just $100,000.00

Remember, the lender CAN NOT include any amount the lender receives in satisfaction of the
debt by means of a settlement agreement...

So now let's look at how this plays out in real world terms based upon our example above:

1. Enter the total amount of the debt cancelled (based upon a short sale): $100,000.00
2. Enter the fair market value of the property from Form 1099-C, box 7: $220,000.00
3. Subtract line 2 from line 1.If less than zero, enter zero: $100,000-$220,000=(-$120,000.00)

I have been out of school for quite, a while but in doing my math a negative number is
definitely less than zero. So accordingly the income derived from the cancellation of debt on a
"PROPERLY FORMATTED" short sale transaction would in fact be ZERO!

Remember, it's not the IRS that is issuing a 1099..it's the bank! I think there has to be some
serious review of this issue and the "water cooler" opinions on the tax ramifications on short
sales needs to come to an end. The IRS has spoken!If you have any further questions email me at ShortSales@Michaelperon.com