‘Tis the season to get those panicked phone calls from those folks whose residence you short sold because they received a 1099-C from the IRS for the difference between the note amount and the short sale amount.

Okay, so it really is not much of a Christmas carol, but in the case you, being a real estate professional, were involved in a successful short sale transaction, then your original home seller will certainly receive a bill for short sale taxes from the Internal revenue service. Why? Because whenever the bank forgives a debt higher than $600, they are going to give that fortunate person a ‘thank you’ notice in the form of a 1099-C and that applies to their annual taxable earnings.

For example, should the cost between the homeowners’ loan and short sale price be $50,000, then the former home owner would most likely receive a 1099-C for $50,000 that would be added to their yearly income and so they would be taxed accordingly. As you may envision, this will likely result in a panicked phone call from your distressed homeowner.

 

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The actual remedy is easy. If the complete financial debt that has been written off was lower than $2,000,000, then there’s a great chance their debt will likely be forgiven under the terms of theMortgage Debt Forgiveness Act of 2007. (By the way, this Debt Forgiveness Act has been extended until 2012.)

So if you get this panicked phone call about short sale taxes, ask the caller to go to the Internal revenue service webpage and obtain Internal revenue service Form 982 ( the form can be found here ) and they turn in this form along with their normal income taxes. This should lead to their short sale taxes debt being forgiven.