Homeowners facing foreclosure will often consider a short sale, a sale of the property where the mortgage holder agrees to take less than the current value of the mortgage, that stops the foreclosure and often saves the homeowners’ credit ratings. Although a short sale can be beneficial, there can be many tax implications that affect the way your taxes must be filed and how much you will need to pay. It’s important to understand these implications and what options you have when it comes to a short sale.
What is a 1099c and how does it affect you?
A 1099c is a form that the lender sends to the homeowner after a short sale is made. The 1099c includes the amount that the bank has written off after the short sale was made. If the lender received $50,000 less than what the homeowner owed on the house, the 1099c would contain that amount. This amount must be filed as taxable income, which can severely affect the amount of taxes you have to pay. However, there are some exemptions, meaning that if you meet certain criteria, you don’t have to file the 1099c.
Exemptions
Some individuals are exempt from the implications of the 1099c form. According to the Mortgage Debt Relief Act of 2007, individuals who short sale their primary residence are exempt from the tax implications as well as those who did not pull money out of the property for any reason other than upgrading the primary residence. So, individuals who fall under these categories will not have to pay the taxes from the short sale. Those who still aren’t sure whether they would need to pay taxes on the 1099c form should speak to a tax professional to completely understand their situation.
State Tax Implications
Because different states have different laws governing short sales and the tax implications of short sales, it’s important to research specific state laws regarding short sales. In most states, the law will be very close to the federal law regarding exemption. For instance, in California those who meet the same criteria as required in the Mortgage Debt Relief Act will be exempt from paying state taxes after filing a 1099c form.
For Those Who Aren’t Exempt
Individuals who are not exempt from the tax implications of a 1099c form may end up having to pay taxes. However, even if the taxes end up costing more than you’re accustomed to paying, you can create a payment plan. Simply call the IRS and inquire about creating a payment plan. A representative will help you create a plan that will work for your finances and expenses. In many cases, the IRS can create a payment plan that gives you very low monthly payments until the final amount is completely paid. This keeps you on the good side of the IRS and doesn’t put you in a huge bind with your finances.
Overall, it’s important to understand the serious tax implications of having a short sale for your home and the subsequent 1099c form from the lender. This way, you will be prepared for all situations and use the information to determine whether this is the route for you or not.
If you have additional questions and would like more assistance, please contact us.
