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Home Guides Home Home Finance Housing Assistance Home Repair Do I Have to Claim a 1099c for a Short Sale on a Home? Lender forgiven post short sale deficiencies must be declared on your tax returns.

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In a short sale, struggling homeowners avoid foreclosure by relinquishing their homes for less than they owe on the mortgage. Lenders approving short sales often agree to forgive any mortgage balance remaining after the short sale, however, effectively canceling that debt. But the IRS doesn’t forget. When lenders forgive the mortgage debt arising from short sales, they typically issue short sale borrowers IRS Form 1099 C, Cancellation of Debt.

IRS Form 1099 C The IRS considers forgiven loan debt to be taxable income gained by the borrowers benefiting from such forgiveness. A home’s short sale for less than its mortgage balance leaves a deficiency or negative loan balance. If you’ve short sold your home, and the lender forgave any post short sale deficiencies,
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you’ll need to report that debt forgiveness on your tax return. Your lender will also send a 1099 C to the IRS in addition to the 1099 C it gave you after your short sale.

Declaring Forgiven Debt Forgiven loan debt is declared on tax returns for the year in which it was forgiven: You can’t decide to declare loan debt forgiven in 2013 on your 2014 or 2015 tax return it must be declared for 2013. Also, don’t wait on 1099 Cs to arrive before declaring on your tax return any loan debt your lender has notified you it’s already forgiven. Lenders sometimes neglect to send borrowers 1099 Cs showing forgiven loan debt, but still send them to the IRS.

Forgiven Debt Exclusions The Mortgage Forgiveness Debt Relief Act of 2007 may allow you to avoid the tax consequences of forgiven mortgage debt. Your lender forgiven mortgage debt may not be taxable if your mortgage was used to buy, build or substantially improve a primary residence. Under the 2007 law, up to $2 million in forgiven mortgage debt on short sold principal residences may qualify for taxation exclusion. Formally declared bankruptcy and insolvencies also qualify as exclusions from taxation of lender forgiven mortgage debt.

State Tax Consequences Fortunately for short sale homeowners benefiting from lenders’ forgiveness of mortgage deficiencies, many states’ tax laws mirror federal tax laws. California, for example,
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conforms to federal law on mortgage debt forgiveness. The Golden State also allows filers to exclude up to $2 million in forgiven mortgage debt resulting from foreclosures and short sales.