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I got a 1099 after my short sale – do I owe taxes?

Posted on Apr 6, 2011 in Bankruptcy and Taxation, Bankruptcy and Taxes

As April 15 approaches, people’s thoughts turn to income tax.  And when they get a form 1099 from their lender after a short sale, they start to worry.  In many cases, the answer is “no worries”.

The problem is that forgiveness of debt is typically considered to be income for tax purposes.  After all, you are better off if you don’t owe the money any more.  You could spend the money you have on other things. So you gained.  And that gain is income.

But what if you are broke and insolvent.  Then you are not able to spend the money you saved.  You just are less worse off then you were before. The IRS understands this and says that if you are insolvent, income from forgiveness of debt isn’t taxable even if you get a 1099 from your lender.

In addition, the Internal Revenue Code was amended in 2007 through the year 2012 to provide that income in respect to forgiveness of debt on a short sale of your principal residence is not taxable. So if you sold your house on a short sale last year, you are also good to go.

There are other ways to limit the pain of forgiveness of debt. If you file a bankruptcy case, you will usually be deemed to be insolvent and not have any income in respect to forgiveness of debt.  And if you have any remaining property you can “reallocate tax attributes” to other property you may own.  If you don’t know what this means, ask your tax advisor since this is somewhat technical.

We at Lakelaw are not tax attorneys.  But we do know about bankruptcy, insolvency and mortgage foreclosure. And when we need to, we know about other areas of law which relate to our areas of concentration.  And as always, we stand ready to serve you with care, kindness, courtesy, respect, professionalism and dedication.


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