It’s that time of year again. The Winter Holidays are behind us, we’ve cheered a new Super Bowl champion and exchanged boxes of chocolates for Valentine’s Day. That can only mean one thing: Tax Season is upon us.
When it comes to your home, there is plenty of documentation of which you need to keep track when it comes time to file your annual return. For those of you filing “standard” income tax returns, this is all fairly clear and straightforward.
With the current real estate climate, however, there are scores situations, like having lost a home to foreclosure, or staring personal bankruptcy in the face, in which many never thought they’d find themselves. Situations like these can make filing taxes a bit trickier.
There’s one circumstance in particular on which I’d like to focus today:
If you’ve gone through the short sale process (where you can no longer afford the payments on your home, but your lender allows you to sell the home at loss, rather than go through with foreclosure), then you know it’s long, it’s arduous, and it’s one in which things have the potential to be very murky.
When completing the reams and reams of paperwork required by your lender to complete the short sale process, it’s likely that you signed a promissory note, or other like document, granting the lender the right to take action against you to collect the deficient amount. This is pretty standard. It’s possible, though, that you also got a copy of a document with the heading 1099-C, which the lender has filed with the IRS, indicating that the unpaid portion of the loan has been canceled. This is a trigger for the IRS to assess taxes against the forgiven debt.
“How is that possible?” you might ask. Good question. It doesn’t stand to reason that a lender can pursue you for unpaid debt and that the IRS can assess taxes, as well. Logic would dictate that one or the other is reasonable, but not both.
Keep copies of everything having to do with anything related to the transaction.
If you signed paperwork indicating that the lender can take collection action against you, but you’ve also received a 1099-C for the uncollected debt, you’ll have plenty of documented proof to show the IRS that you don’t owe taxes on that amount. Similarly, if there is nothing in your sale paperwork that gives the bank the right to collect the debt, nor is there any other reference to it, the 1099-C will serve as evidence should the bank, at some point, decide to take action against you.
They can’t have it both ways.
I’m not a tax professional. I’m not certified to give that sort of advice. But I can advise you to seek the counsel of a tax professional, so that negotiating the maze of tax ramifications that come with a short sale is made somewhat easier.
For additional information you can also download IRS Publication 4681 from the IRS website at www.IRS.gov