Short sale 1099 tax avioded with tax code? - Posted by Jan

Real Estate Investing
#1

Posted by JT-IN on April 08, 2007 at 11:57:21:

Dave:

Great to have such a concise reference to the issue of debt forgiveness and potential tax liability. This would be a great article to include in any investors short sale presentation to a potential seller. This relieves the investor / purchaser from being the person making the representation, in fact a good thing to get the seller to initial and date acknowledging a receipt and understanding of the article.

Thanks.

JT-IN

#2

Short sale 1099 tax avioded with tax code? - Posted by Jan

Posted by Jan on April 06, 2007 at 14:25:02:

I heard one of the gurus say that if a short sale is done and the seller gets a 1099 he doesn’t have to pay the tax if he was insolvent at the time. Guru mentioned that there is an IRS Tax code for this. Does anyone have any more information?

#3

Re: Short sale 1099 tax avioded with tax code? - Posted by Bill Jacobsen

Posted by Bill Jacobsen on April 07, 2007 at 03:09:47:

I believe the tax form to use to declare insolvency is IRS form 982.

Bill

#4

Re: Short sale 1099 tax avioded with tax code? - Posted by JT-IN

Posted by JT-IN on April 06, 2007 at 22:22:10:

Jan:

Taxes are avoided by being insolvent or having filed a liquidation BK, Ch 7. The insolvency is calculated prior ot the forgiveness of the forgiven debt, and insolvency is described as having more debt than assets, prior to the forgiven debt. After the debt you could be worth a ton… but it is a measure of where you would be if the debt is NOT foregiven… usually not good. If good, you pay the tax…

See IRS Publ 544 here: (read pgs 4 @ bottom and tope of pg 5)

JT-IN

#5

Re: Short sale 1099 tax avioded with tax code? - Posted by Ron M

Posted by Ron M on April 06, 2007 at 17:09:32:

I don’t have the code, but think there may have to be an actual bankruptcy involved to apply this concept.

If they occupy the home for 2 out of the last 5 years, they are exempt upto 500K for married couple.

#6

Ron, apples and oranges - Posted by NJD

Posted by NJD on April 07, 2007 at 10:22:38:

Ron, you are confusing cap gains tax with ordinary income tax. Your are right about $500K exemption in cap gains. But forgiven debt is treated as ordinary income. In the case of preforeclosure short sale, or DIL, the ‘income’ arising from forgiven debt may or may not be exempt from tax depending on the mortgagor’s solvency or insolvency at the instant the debt was forgiven.

#7

Re: Short sale 1099 tax avioded with tax code? - Posted by Brad

Posted by Brad on April 06, 2007 at 18:27:15:

I’m not by any means an authority on short sales, or tax code for that matter, but I don’t believe the short sale 1099 falls under this exemption.