The Income Tax Effect from a Short Sale or Foreclosure: IRS Form 1099-C
Who is Affected?
- Any property owner who was personally liable on a real estate loan that was foreclosed or partially paid off in a short sale.
What is 1099-C Form?
- This form represents ordinary income (not capital gain) for the “Cancellation of Debt” of the seller/owner. The amount must be included in income on the seller’s income tax return.
When will the 1099-C be Issued?
- Unless the lender is pursuing a deficiency judgment, the 1099-C must be issued by January 31st. If the lender sends the 1099-C, the lender has written off the loss as a bad debt.
How is the Amount on the 1099-C Determined?
- For a Short sale: the difference between the full payoff and the short sale payoff
- For a Foreclosure: the difference between the full payoff and the fair market value, based on an appraisal at the time of foreclosure.
Does the Seller have any offsets against this income?
- Sale of principle residence (IRS form 982): this is subject to some limitations on amount and the qualifying debt;
- Capital loss: seller’s capital loss (for investment property) can be used to offset capital gains and a small portion of ordinary income;
- Insolvency: income can be offset to the extent that debts exceed assets;
- Bankruptcy: depending on when it occurred and whether the debt was included.
Be sure to consult with your tax preparer!