Foreclosures - Waive 1099 on short sales

[reiaustin]

Does anyone know how to get the 1099 waived from a short sale?  

Thanks,

reiaustin

[Admin]

MH,
I would go and spend some time searching for a way to find a free search for the tax code.  Alternatively, you might try a CPA to find out what online resources they use to search the tax code.

I spent a few minutes looking this morning, but wasn't successful.  At one time a year or so ago, I did stumble across a link to it.  My recollection is that the verbiage in the code was not specific (how unusual) in describing insolvency.  

In other words, the key was the ability to prove insolvency at the time the event occurred and I think bankruptcy would go a long way toward that.  However, there was not a laundry list of things you must do this to prove insolvency.  Again, based on ancient memory here, but I recall thinking that one would need to pull in an outside professional to substantiate the insolvency claim if the 1099 was large enough to raise eyebrows.

None of the folks who claim to "specialize" in short sales have ever been able to answer that question.  I always get the feeling they just fail to mention it in their presentation.

You might try a search for "CCH" as well as the tax code.  If I recall correctly, it was under "debt relief" as opposed to "1099" or "foreclosure".

Hope that helps some...

Tim

[StacyKellams]

Rei,

I just got back from Ron LeGrand's one day short sale workshop.

From what I understand it's totally up to the bank to decide if they will pursue a deficientcy judgement against the seller and 1099 them.

I've been told that sometimes they do and sometimes they don't so you never know. All you can do is prepare the seller for that possibility. However, I don't think you can just ask the bank not to do it.

[Admin]

Stacy,
You may be right about not asking the lender to waive it, but it certainly can't hurt to ask in the cover letter?  At least that's what I've been doing recently.  I doubt I'll ever receive anything in writing as a response that says "sure, Tim, we'll be happy to waive the 1099 and write off the loss, tell your seller not to worry about it, thanks for asking".  

What I'd like to know is whether or not an investor has ever gone back to a seller well after the fact, right around tax time, and actually asked.  Granted, that's pretty far-fetched, but perhaps a seller has contacted the investor to inquire why they received one.  I can certainly see that happening if one were doing a ton of these.

Guess the only way to find out is to become the one who's doing a ton of these... :F

[StacyKellams]

I agree, it never hurts to ask.   :thumbsup

The bank has to send out the 1099 in January or they lose their right to 1099 the seller.    

If anyone knows investors that did any short sales last year you might ask them about this since January is almost over.

 

Stacy

[JT-IN]

On a short sale, where debt is forgiven, IRS Publ 544 specifically spells out that the Lender "must file a 1099-C".    However, in real life some Lenders fail to comply and if audited they would have to contend with the IRS for non-compliance.

The real issue is not whether the Lender sends a 1099, but what are the tax implications of that 1099...?   The same Publ 544 specifically exempts taxes from being owed on forgiven debt, (a short sale), when the taxpayor is either a) insolvent:  liabilities exceed assets, prior to debt forgiveness, or b) filed for bankruptcy.

Now let's face it, when a homeowner qualifies for a short sale, they are not exactly flush with assets, and in just about every case that I have been invovled in the liabilities exceeded the assets by a pretty good margin... in other words there was no way to repay the lender, nor is there any real way to pay the taxes on the forgiven debt.

What is required in the tax year that the short sale was completed is file... preferrably an accts balance sheet showing that the assets exceeded the liabilities and whalla, no taxes owed.

You can read more about this in IRS Publ 544 below:

http://www.irs.gov/pub/irs-pdf/p544.pdf

JT-IN

[Admin]

JT,
Welcome...

Also, thanks for the clarification and the bookmark.  That's exactly what I was needing and I couldn't remember which pub it was.