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Do I Have to Pay Taxes on a Short Sale? The 1099-C, H.R. 3648 and the Insolvency Rule

October 10th, 2011 |

Author: admin

Do I Have to Pay Taxes on a Short Sale? The 1099-C, H.R. 3648 and the Insolvency Rule

By Dave Halpern, Louisville Short Sale Expert (502) 664-7827 or (502) 895-3100

Three possible answers to the question: Yes, No, Maybe.

Short sale listing agents should always disclose to their clients there is a possibility they will have to pay taxes on any forgiven debt.

Sellers are strongly encouraged to consult with professional legal and tax advisers.

Realtors who help clients avoid foreclosure should be knowledgeable of tax issues related to a short sale. The Realtor should disclose and direct the sellers to ask a CPA or tax attorney about the following issues:

1. What is a 1099-c (1099 income resulting from cancellation of debt)

2. What is the mortgage forgiveness act H.R. 3648 Mortgage Forgiveness Debt Relief Act of 2007

3. What is the insolvency rule? From the IRS site http://www.irs.gov/newsroom/article/0,,id=174034,00.html

“Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you.You are insolvent when your total debts are more than the fair market value of your total assets. Insolvency can be fairly complex to determine and the assistance of a tax professional is recommended if you believe you qualify for this exception.”

4. Ask the tax adviser if there are any other tax issues that may be relevant to the sellers unique circumstances.

In very general terms, to be verified with a CPA or tax attorney:

The 1099-c is issued by the lender in the amount of the forgiven debt. Under certain circumstances the seller may have to pay taxes on the forgiven debt as if it was earned income.

H.R. 3648 is an amendment to the IRS code that under certain circumstances exempts the seller from paying taxes on the amount reported on the 1099-C.

The insolvency rule is a rule that under certain circumstance may exempt the seller from paying taxes on the amount reported on the 1099-C.

There may be other tax liabilities and tax exemptions. A CPA or tax attorney will have knowledge that is authoritative, in-depth and up to date.

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Posted in 1099-C, CPA, Canceled Debt, H.R. 3648, Short Sales, Tax Attorney, Tax Consequences, Tax Credit |

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