Eliminating the tax on the writeoff is part of one of the bills in the Senate now, I believe.  

I hate to sound tough but I think that it IS income on some instances!

If someone purchases a property and finances 100% and the value goes down and has to sell as a short sale, then it should not be income. But if someone already has the equity and refinanced several times to take ALL the equity out and then the value goes down and sells the house as a short sale, well, I do think that this IS income and it should be reported as such.

Some of the responsibility do fall on the banks that allow those 100% financing but the owners of those properties can't just use that equity and walk away...........

I have heard horror stories of people doing the short sale, and then in February of the next year be surprised to have a 1099 show up in the mail.  I agree with Sagine, that in many cases it was income at some point, but also know for most it just adds insult to injury.  I think the borrower can negotiate into the short sale a provison that the lender does not report and deficeincy to IRS.

I don't believe anyone should try to negotiate with the lender to get them to do an illegal act like not report and deficenicy to the IRS, but... the seller who gets the 1099 can file a for a hardship consideration with the IRS. As Kathy stated, there is a bill before the senate to eliminate the tax.

In order for the bank to write it off their books they have to show that it is being credited to someone else........ that is why the owners receive the 1099....... write off is a debit to the bank and the credit goes to the owner of the property..........

I don;t believe the lender has a choice not to report the loss to the IRS.. it is just a question of debit and credit....... maybe a CPA could clarify this........

Sagine

If the agent involved doing the short sale has some experience with these situations the 1099 can be negotiated out of the end product and the deficiency forgiven by the lender.

My understanding:  According to current tax and banking law, the lender MUST report the amount of debt forgiven as 1099 income.

When accepting short sale offer, seller should write on the acceptance, "subject to short sale approval by lender, and waiver of deficiency".

Seller can and SHOULD ask the lender for a waiver of deficiency in event of a short sale.  Seller is likely to get the waiver if the seller has no other significant or liquid assets.  Out of roughly 8 short sales done recently by me as agent, only one bank refused to waive deficiency.  Seller had good income and bank wanted them to sign new note taking responsibility for the debt.  

Have seen banks waive a $30,000 deficiency for somebody who had $30,000 in an IRA - (due to non-liquid nature of asset - but they would not have waived deficiency if seller had savings).  

Even after a waiver of deficiency - seller still gets a 1099 and must declare the income.  

Also My understanding:  According to current tax law the taxpayer can file a hardship letter and ask that the 1099 income on forgiven debt can be waived as income - but this is not automatic...  UNLESS the taxpayer filed bankruptcy in the same year as the short sale.  

Bankruptcy is apparently taken as ironclad proof of hardship. In case of bankruptcy in the same tax year, the forgiven debt as income issue is more or less certain to be waived according to IRS policy and procedure.

The bill to eliminate this "1099'ing" has pased the House and is waiting on the Senate. President is expected to sign.

But it's been stalled in Senate committees' for weeks.

Many lenders will waive a deficiency judgement -- meaning they won't come after the borrower later for the short amount.

But they'd be breaking federal tax code (as currently written) in not issuing a 1099. Good luck "negotiating" with a lender to do that!

So here I'll say it in print -- I AGREE with Lonn :)

Don't think going into foreclosure will save them from a 1099c either.  

But the key word here for Short Sale is "hardship".  Your seller can not sell their home as a Short Sale just because the property values have dipped under what is owed.  They need to have a legitimate hardship that is approved by the lender.  

Jana