Handling IRS 1099 income

Stu and Misty receive a lot of questions about 1099 income from Short Sales or Foreclosures. As always we recommend you seek proper legal advice from a competent lawyer and or accountant as each person's case can be different and this should not be considered rendering legal advice. After all we are Realtors, not lawyers or accountants and 1099's are not what we are licensed to interpret. Having said that, we can give a "rough" overview as described to us from professionals we trust.

Stu and Misty receive a lot of questions about 1099 income from Short Sales or Foreclosures.
As always we recommend you seek proper legal advice from a competent lawyer and or accountant as each person's case can be different and this should not be considered rendering legal advice.
After all we are Realtors, not lawyers or accountants and 1099's are not what we are licensed to interpret.
Having said that, we can give a "rough" overview as described to us from professionals we trust.

The 1099 is frequently issued by the bank to the seller in the amount that the bank has forgiven or written off. It is the amount on the loan that was not paid off, not the entire loan amount.

In most cases debt that is written off or forgiven by a lender is ordinary taxable income to the debtor. Having said that there are three exceptions (see IRS from 982 at IRS.gov), maybe there are more but this is the three we know of. Check with your accountant for the latest tax advice.

1)      Debt forgiveness on Principal Residence:

Please see The Mortgage Debt Relief act of 2007, which allows non recognition to certain debt that was forgiven on the principal residence.

·         The debt must be forgiven during the period of 2007 thorough 2012 (unless extended of course)

·         The property must be the principal residence.

·         The exception must not exceed 2 million (1 million for singles) on forgiven debt.

·         The write off must be done because of a decline in the home’s value and or the taxpayer’s financial condition, which means from loan modification or foreclosure.

·         The debt must have been secured by the home, to buy, build, or substantially improve the principal residence, or must be refinanced debt for that purpose, Second mortgages taken out to pay debts, take vacations, etc do not qualify.

2)      Insolvency Exception:

You may avoid taxable income if you are insolvent. "Solvency" is measured by subtracting the amount of all debt from the fair market value of all assets. This includes Home Equity, IRA’s, life insurance policies.

3)      Bankruptcy exception: