Short Sale Information

Our market is beginning to have foreclosures, with that the option of short sale arises. Here is a Q&A from the LA Times that gives information for agents and their clients.

LA Times: Real Estate Q&A
By Robert J Bruss
Inman News

Question:
After listing our home for six months with no purchase offers, we were unable to keep up the mortgage payments and defaulted. The realty agent suggested a “short sale” for less than the mortgage balance. Rather than foreclosure, our mortgage lender agreed to accept a purchase offer for about $16,000 less than the mortgage balance. We were happy to get rid of the house and its mortgage. But then we received an IRS 1099 form showing $16,000 taxable income to us. Is this a mistake?

Answer:
It’s no mistake. When a mortgage lender agrees to a short sale for less than the mortgage balance, the IRS considers the amount received by the lender, which was less than the amount owed, to be taxable debt relief income to you as the borrower.
The IRS reasons that because you won’t have to repay that $16,000 loss the lender incurred, it is the same as if you had received $16,000 income, such as job salary. Although you may not agree with the IRS viewpoint, debt relief in the form of a mortgage short sale is taxable to borrowers.