Do I Have to Claim a 1099-C for a Short Sale on a Home?

Short sales may result in debt forgiveness, which is considered taxable income.

Yes, You Do

If your mortgage lender agrees to a short sale deal---where you sell the house for whatever you can get---the Internal Revenue Service considers this a forgiven debt. Forgiven debts are considered income for tax purposes and require the lender to furnish a 1099-C form, according to the National Association of Realtors.

Mortgage Forgiveness Debt Relief Act of 2007

As of 2010, homeowners can avoid paying taxes on short sales under the Mortgage Forgiveness Debt Relief Act of 2007, according to the Internal Revenue Service. Congress, however, must renew this act in 2012 for it to continue to be an option.

Bottom Line

The Mortgage Debt Relief Act does not apply to every short sale. Exclusions include vacation and rental homes. In addition, people who go through a short sale may still have to pay state taxes, according to Bills.com.

References

• National Association of Realtors: Loan Forgiveness
• Internal Revenue Service: The Mortgage Forgiveness Debt Relief Act and Debt Cancellation
• Bills.com: Information on 1099 Income From Short Sale