please watch this video for referrence on the 1099
Since we are in the tax season, I Thought this would be very appropriate for homeowners to know, when dealing with a short sale or a foreclosure lender has a few possible ways to handle the deficiency balance, which is the portion of the mortgage debt not covered by the sale of the home. The lender can attempt to collect the deficiency balance from the seller after the property has closed, lender may require the seller to sign an unsecured promissory note for the deficiency balance as a condition of agreeing to the short sale. If the new note is for less than the balance of the original debt, the difference would be considered canceled, or forgiven, debt. The best one is, the lender may agree to cancel the entire deficiency balance.
The last statement may sound good but please be aware that the IRS considers any canceled mortgage debt as ordinary income. This means that the amount forgiven is taxed at the same rate as ordinary income somewhere between 15 % and 30%. In addition, because the IRS requires the lender to file a 1099-C form stating the amount of the canceled debt, Friendly Uncle Sam will have a record of the exact amount of the debt that was cancelled. A seller will also receive a copy of the 1099-C to use in filing income taxes. The seller’s home state would also consider the cancelled debt as ordinary income.
I am not trying to scare you but there are ways to handle this please visit http://www.shortsalesedu.info/Short_Sale_Q_A.html and scroll tot he question “How will a short sale affect my taxes? And make sure to click on the link for “The Mortgage Forgiveness Debt relief Act of 2007” in there you will find the exceptions to the rule regarding the 1099 C.
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