A seller recently called me in a panic, "I received a 1099C from the bank and I owe the IRS almost $18,000." She had done a Short Sale last year and was preparing her taxes. She received the Bank's 1099 Form showing the forgiven debt, the difference between what the house sold for and what she owed.
However, the good news for this seller is the Mortgage Forgiveness Debt Relief Act of 2007. The law saved her from having to pay this huge tax. Once the seller filed the IRS Form 982, the problem was corrected on her taxes.
According to the IRS, "The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief."
Prior to 2007,the difference between what the house sold for and was owed, was considered forgiven debt, and may have been taxable.
Since the law only protects those that qualify until of the end of 2012, if you have been considering a short sale now is the time to do it. Since short sale bank approvals can take anywhere from 3-6 months, you need to start making plans .
While I always advise sellers considering a short sale to consult with their attorneys and/or an accountant, you will also want to consult with a Realtor who has the Short Sale Foreclosure Resource designation from the National Association of Realtors. Agents with this designation have gone through special training to specialize in short sales.
For more information, you will want to visit the IRS website on Mortgage Debt Relief Act of 2007 .
ABR, CRS, e-Pro, GRI, SFR
Coldwell Banker Residential Brokerage