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By Sean A. Kelly
The form 1099-C is generated when a home owner sells his or her property using a short sale. But many people are unaware of short sale 1099 and other outcomes of a short sale. While many homeowners feel that once the property is gone all financial obligations are wiped out, this may not necessarily be a correct assumption. In cases where short sale 1099 is passed the borrower is liable to pay taxes on the debt that has been forgiven. There are also other legal implications. Additionally, most borrowers are concerned about their credit scores before going in for a short sale.
But the most painful possibility is that of losing your home in a foreclosure short sale and also being hit with a huge IRS bill. Generally when the short sale is not performed correctly and the short sale proposal request is not properly formatted, you may actually end up being hit with a huge tax burden. What is important to note here is the fact that while the Mortgage Forgiveness Debt Relief Act of 2007 relieves the homeowner of any potential liability regarding the shortfall that may occur in a short sale, in most cases this applies only to foreclosures on primary residences. Also, there is still a ray of hope for the borrower on the investment property or second home if he or she can prove insolvency. Generally you can prove your insolvency without having to file for bankruptcy since the threshold for proving insolvency is much lower than qualifying for bankruptcy. If you can prove that your debts exceed your assets, they may be absolved with the use of the IRS Form 982.
A short sale can help you in debt consolidation by allowing you to sell your property at a lower price than the original price when you purchased it. After the completion of the short sale process, the bank issues a satisfaction note to the borrower and releases him from the mortgage. Short sale dealings can vary from lender to lender with each lender setting its own terms and objectives. The tax liability on short sale may also depend on the type of property you are selling. If you are selling your primary home then according to the Mortgage Forgiveness Debt Relief Act of 2007 your forgiven debt is excluded from the tax amount. Any additional funds attached with short sale or foreclosure are also forgiven. But the problem arises from the fact that the IRS (Internal Revenue Service) considers the forgiven debt amount as taxable income.
If you are not selling your primary property then you would be eligible for taxable payments. For situations like agricultural loans, non recourse loans, bankruptcy or unsolved cases taxes on a short sale are forgiven. But if your case involves business mortgage, credit card payments, car loan payments or rental property issues then taxes on a short sale won’t be forgiven.
Interestingly, understanding how your lender reports on the 1099C may be critical for you. It is always advisable that you look closely at the amount of debt forgiven and verify the value that is listed for your home. If you have received an erroneously prepared 1099C from your lender you must immediately contact them for corrections. It is important to review the 1099C to determine its accuracy because if you are not careful, it may cost you money!
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