If you are considering a real estate short sale of your home, be prepared to receive a form 1099-C for the amount of the lender’s losses. In the eyes of the IRS, this is considered “loan forgiveness”. You may be responsible to pay ordinary taxes on the amount of the 1099-C.
If you settle a debt with a creditor for less than the full amount owed, you may be required to report this forgiven debt as regular income, with certain important exceptions. The forgiven debts include money owed after foreclosure, property repossession, or credit accounts that you don’t pay.
If a lender writes off a debt of $600 or more principal balance, they must send you and the IRS a Form 1099-C at the end of the year. When you file your taxes on that respective year, the IRS will require that you include the amount as income.
While you may not receive this form from the creditor, the creditor may have submitted one to the IRS. If you do not list the income on your tax return and the IRS has the information of the transaction on file, you could get a tax bill or a request for an audit.
There are several exceptions to this as stated in the IRS tax code. For example, you do not have to report the income if the write off of the debt is intended as a gift, your debts are discharged in a bankruptcy proceedings, or you were insolvent prior to the settlement with the creditor. Always consult a qualified tax professional when contemplating your situation. Remember, information is power. It is Empowering.
This information is not intended as legal or tax advice. Always consult your tax professional or attorney prior to making any decision regarding these types of situations.