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Form 1099 C Short Sale

  • 1.  Form 1099 C Short Sale

    Posted 03-29-2019 06:58
    Client rec'd Form 1099 C for mortgage debt forgiveness through a short sale on her home effective mid 2018.  Original agreement and closing on the property were both during 2018.  Her total liabilities prior to the debt forgiveness were $505,000, total assets were $235,000.

    Previous accountant told client she would have to pay tax on debt cancellation because 'agreement was not entered into prior to 2018.'  

    I've always used the 'insolvency rules' through Form 982, is this still the case?

    Connie Machado, EA, CAA
    Bohemia, NY

  • 2.  RE: Form 1099 C Short Sale

    Silver Most Valuable Member
    Posted 03-31-2019 13:30

    If the discharge occurs when the taxpayer is insolvent the exception still applies. [IRC Sec. 108(a)(1)(B) ]. [However, this exception applies only to the extent of the taxpayer's insolvency-IRC Sec. 108(a)(3) ]



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  • 3.  RE: Form 1099 C Short Sale

    Posted 04-02-2019 21:57
    New twist to this case:

    I just realized that Form 1099 C states that 'debtor is NOT personally liable for repayment of debt'
    From what I understand, there's no taxable income from discharge of indebtedness because it is a nonrecourse debt.

    On the other hand, does short sale of home have to be reported on tax return?
    If so, is there a taxable capital or ordinary income gain?
    Facts are as follows:
    • Short sale contract price $210,000
    • Contract date 1/10/18
    • Sale date 6/26/18
    • Basis = $0 (taxpayer rec'd home as 'gift' from ex-husband on divorce settlement many years ago)
    • Total mortgage debt prior to sale $417,000
    • FMV as per 1099 C is $230,000
    • This has been taxpayer's primary residence for the past 20 years
    Any help would be appreciated.

    Thank you

    Conchita Machado EA
    Complete Multi Services 1 LLC
    Bohemia NY