Question: We had 2 investment properties – 1 foreclosed in 2009 and we just got a 1099 C for the second (which was part of the 80/20 purchase money. We also got a 1099 C for the second on the second property that foreclosed in March of 2010 again purchase money. How do we report this? Is this income? If so and we owe a crazy amount to the IRS what can we do when we have little reserve?
Answer: – This is reported as income on your taxes. Your accountant will help you through all this. In many cases, you can claim insolvent which means your liabilities exceed your assets or if it was a personal residence because of the new laws you won’t have to pay taxes on this amount. Have your accountant help you with all this, it makes it much easier.
Great article!
I have talked to several homeowners who are in foreclosure and are upside down on their mortgage. They all were interested in doing a short pay off until I told them about the possibility of the lender sending them a 1099 for the difference. I always point out to the homeowner that although they receive a 1099 they should consult with a CPA because they could get a waiver if they can show that they have a negative net worth. After explaining this to the homeowners they still seems to be reluctant to go through with the short pay off.
What are the pros and con here?
Is it customary for lenders to exercise this option?
Does the homeowner have any other option to get the IRS to wave the 1099?
Thanks!
This is a great question. Unfortunately there is not much you can do to stop the lender from sending a 1099. However, even if the homeowners get a 1099 because you discounted the loan, they were probably going to get one anyway when it went to auction and no one bid. In fact, they may even get slapped with a deficiency judgment. However, by you paying something for their loan, even though it was for a discount, usually means the income on the 1099 will be less because you paid something for the loan. And by doing a short sale the right way, you can avoid the whole deficiency judgment concern. They shouldn’t even be concerned with the 1099 because for most people, form 982 will counteract it. They should be concerned with the deficiency judgment. You are bettering their situation no matter how you look at it. It’s tons worse if you do nothing..
1099 & Deficiency Action in UTAH
My Dad, who lives in UTAH lost a UTAH “building” lot to a Non-Judicial Foreclosure in July of 2008.
Loan amount 200k. Builder then sold the
lot for 160k (2weeks later) & then within the 90 days after the sale, filed a Deficiency Lawsuit for 45k including Attorneys fees. The lot “should” be worth
about 400k & this was my Dad’s affirmative
Defense in the matter, when he filed his response with the Court. The matter was
settled between the 2 parties (My Dad & the Bank) for less than the 45k. The question is. Will the bank 1099 my Dad & in what year 2007 or 2008, and for what amount?
The guy at the bank wasn’t sure; but he though they had to 1099 my Dad for the whole 45k.
My Dad obviously doesn’t want to pay taxes on 45k on the lot he didn’t really have a “gain” on.
He may not of had a gain, but the bank took a loss, which is considered a gain to your dad because he didn’t have to pay it back. They typically 1099 you for the amount that was lost. But you also say they filed a judgment against him, which he settled. So in this case, he may not be 1099. It all depends on the settlement. If he does get 1099, the IRS puts out form 982 (you can search for it on irs.gov) that for most individuals counteracts the 1099 so he won’t be taxed on the gain.