Short sales

So much more needs to be known before anyone can really answer what is going on here, but firstly, yes, anyone doing a short sale that has cancelled debt associated (all of them) will get a 1099. Cancelled debt is a TAXABLE event. There is no way to avoid GETTING a 1099.

Now whether you are responsible for paying the taxes is another matter. Doe this listing agent know what they're doing? I would assume one doing a short sale would know about the Mortgage Debt Forgiveness Act of 2007 for home sellers of primary residences, and would have a list of expert resources for his/her sellers before they even proceed with a short sale. A short sale can have SIGNIFICANT tax, recourse, legal and credit implications.

Those sellers should have been advised to see a CPA for expert advise. We are not tax experts or attorneys, so maybe this seller has different circumstances than you've been lead to believe/ or that you've assumed. However, this mortgage debt forgiveness act only covers federal taxes, not state, and each state may vary (you can find the rules on the irs website).

As far as the note.. it depends. Is she talking about the first loan? is it purchase money, non recourse? or is it a recourse loan, cash out, refinanced, a second or a heloc? Was this a primary residence for these sellers? This seller needs guidance from an attorney.

I guess the question is (assuming for the moment that there is a first only), if the sellers were to sign a promissory note for the balance, would the bank still issue a 1099? If so, would they then issue a revised 1099 after the debt was paid?

Linda

Linda, an attorney told me yes, they would revise the 1099 as a debt is collected. So issuing a 1099 is NOT a good way to assume that the bank has decided not to collect. They can still pursue collections and revise the 1099 later. (I'm not an attorney or CPA)

Quoting Mary Ann:

I have been working with a buyer who is hoping to purchase a short sale home. The sellers have vacated the property, the house is only 3 years old, but according to the listing agent, no one is responding to her as to whether or not they will accept, counter, or reject the offer. They are telling the sellers that if they accept any offer, the sellers will need to sign a promissory note for the balance they owe and the sellers will get a 1099 form for their 2010 taxes for the amount of the difference between what the house sells for and the amount the bank was shorted. Does this seem fair?

We have been encountering this more and more, where the bank will release the lien on the property, but not completely forgive the debt. If there's no promissory note, the unpaid balance becomes an unsecured debt (harder to collect). Either way, the debt will be sold to a collector for pennies on the dollar, and can be setlled for a lesser amount down the road.

Jennie Blackburn

Blackburn Investors Realty, Redington Beach FL

Jennie Blackburn

Re 1099s: Interesting, Catherine, and that makes sense. BUT in this case, it seems the bank wants a note for the full balance, hence no debt is forgiven, so why a 1099? Assuming of course that the seller goes for it, which why would they? If they can afford the debt, they'd be better off paying it and keeping the house rather than paying it for no house! Linda