Short Shotsale question... - Posted by Greg D

Posted by JT-IN on February 20, 2003 at 21:58:54:


The Lender’s will be obligated to send the Debtor a 1099-C, which signifies cancellation of debt, via the short sale. The Lender’s really have no choice, as the IRS dictate that they send it, but still some lenders do not.

What is at issue more than whether they receive a 1099 is what is their tax liability from the debt foregiveness…? In IRS Publ 544 it outlines the perameters of what is taxable when debt foregiveness is granted. The amount of debt foregiven may not be taxable, in spite of receiving a 1099, when the taxpayor is either a) insolvent; (your liabilites exceed you assets), or b) you are bankrupt. You can also read IRS Publ 908 which identifies how the insolvency issue works.

When most folks qualify for a short sale, they are insolvent otherwise the Lender won’t grant the short sale if the ability to repay the debt exists. What is recommended is in the tax year of debt foregiveness have an acct prepare documentation identifying the insolvency and to the extent, and there will usually be no taxes due.

You can view IRS Publ 544 here:

As to the Mechanics lien, you should attempt to purchase it at a discount as well. If the priority of the ML is jr to the 1st lien then they may allow only a small repayment. This is very negotiable, but answered only by the senior liens and what the ML might consider accepting.

Wish you all the best on this deal…


Short Shotsale question… - Posted by Greg D

Posted by Greg D on February 20, 2003 at 20:27:37:

I’m working with a owner who has a notice of default from his 1st. He’s also behind on his 2nd, he knows it’s time to go and will work with me.

The 1st is open to a shortsale, and the 2nd has already agreed to a substantial discount. Here are my questions…

Since the banks will be taking a loss, will the seller receive an unpleasent surprise from the IRS in form of a tax bill for the shortfalls?

He also has a mechanics lien, will the bank allow me to pay that off?

Of course any info is much appreciated!