Temecula Short Sale Agent explains why you get a 1099-C after the close of a short sale.
When a Creditor (your lender)writes Off or Settles a Debt they do so with the 1099 form.A copy is mailed to you after the close of your short sale and a copy also gets reported to the IRS.The IRS may count this debt written off or settled by your creditor as taxable income.This is also called “Phantom income” and this has caused alarm for many homeowners doing a short sale.
Most people don’t know that with a Foreclosure, you will also get a 1099. In the case of a Foreclosure the 1099 is called a “1099-A” and the ‘A’ stands for “Acquisition or Abandonment of Secured Property”. It is important to know that while there are many differences, the tax consequences for the ‘C’ and the ‘A’ are the same.
Will you be facing a large tax bill?
Because of The Mortgage Debt Relief Act of 2007 you may not be required to pay taxes on the ‘income’ as shown on the 1099-C. If your property was your principal residence you should be protected by this Act.However, you shouldn’t just assume that you won’t have to pay. It’s very important you consult a CPA or tax expert when selling your home as a short sale.