California Short Sale..can I avoid receiving a 1099?

Guest 0.10 Dollars($)

Hello,

I purchased a condo 2 years ago for $335,000 with 100% financing. I moved in for a month and it is rented now. I'm currently 4 months behind with each 1st and 2nd mortgage company. No property taxes have been paid and Homeowner Association dues have tallied up to about $2,000 as well. The condo has been for sale for 3 months; I believe it will sell for $300,000, next week...I owe about $340,000.

According to California Code of Civil Procedure 580b, because the mortgage was "used to pay for all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser," no deficiency judgement shall lie.

I'm thinking I have two options to negotiate with the lender:

1) Sell the house and have the lender(s) do a lien release allowing the sale, then negotiate new terms to repay the balance of what I owe them. (possibly a no interest loan).

2) Sell the house and tell them I don't want to pay them anything. Have the mortgage debt forgiven and receive a 1099 for the balance of what I owe them.

IS THIS CORRECT???

Is it the IRS that requires the lender to file a 1099 and report the forgiven amount as income to the borrower? Or can I somehow avoid receiving the 1099 at all, since I can avoid receiving a deficiency judgement regardless of them 1099'ing me.

TAXES:
Considering the condo is rental property and I'm selling it for less than I purchased it for, the taxable gain would actually be a loss. So the difference of purchase price (balance owed) and the sale price, would be the 1099 amount and also rather close to the loss on investment. So the tax implications wouldn't be as dire as adding an additional $40k to my gross income...or would it?

Somebody please read this and tell me if I'm on the right track here. I'm leaning toward receiving a 1099 and having the debt forgiven. Is this a good choice or is there a better option?

Thanks,

Steve

sara · Posted: Tue Jun 26, 2007 12:08 am Post subject: RE: forgiven debt and 1099 form

Hi Steve,

Welcome to the forums.

I don't think it is a good choice because if you sign a 1099 form, your debt is no doubt forgiven but the IRS will consider it as your income. Hence you would have to pay large amount of income taxes. And, by the way, do you owe $340,000 on both the loans?

I don't think both the companies are going to forgive your debt. Still, you can talk to them regarding this and also consult a tax advisor on how much taxes you may have to pay on the forgiven debt, if at all, the debt is cancelled.

Take Care

0.10 Dollars($)

Hello Steve,

If your debt is forgiven, then the amount that you owe would be taken as your income by the IRS. However, if you still pay off the debt within 3 to 5 years of cancellation, you can claim for a tax refund from the IRS.

jenkin7 · Joined: 04 Jun 2007 Posts: 894 133.63 Dollars($)

Hello Steve,

A cancelled debt is considered as income, so it should be reported to the IRS. The companies normally issue a 1099-C form. At the time the debts were cancelled if you were insolvent, then, you do not have to report that forgiven debt as income. Insolvency is defined by the IRS as a condition in which your liabilities exceed the fair market value of your assets. It is hence likely that none of your forgiven debt is taxable.

Samantha · Posted: Tue Jun 26, 2007 3:16 am Post subject: RE: sell home to pay off debt

Hi,

What I find is that you have a lot of debts including the mortgage on the condo, the homeowner association dues and then there are the property taxes. I'm not sure but are you aware that if you don't pay the property taxes, the IRS can place a tax lien against your home. And, even if you sell the house, the lien will be reported on your credit report and that's going to affect your credit for a long time indeed.

Now considering the options that you've mentioned, I doubt whether any lender would offer a release of lien prior to the sale of the house is over. You need to discuss this option with the lender though I guess he may say no. By the way, if you are thinking of negotiating newer terms of the loan, why not do it now itself without even selling the property.

Hope this helps...

God bless you.

Samantha

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