We did short sale the house and the closing went through, we received a 1099 from the mortgage lender.?

Question

The mortgage lender didn't want a forecloser and the house was worth less(after being appraised) than we were told, 6 months before, when we refinanced.

Answer 1

You likely received a 1099C from the lender, a cancellation of debt. The amount of cancellation was the difference between the balance of the loan on the house and the proceeds from the sale.

The cancellation of debt is taxable income that goes on Line 21 of Form 1040 for the year of cancellation. It is taxable income.

If you were insolvent or bankrupt, the cancellation of debt is not taxed. If this is the case, do not include the amount of cancellation on Line 21 of Form 1040. See a tax pro to help you fill out the necessary Form 982 and supporting documentation.

Answer 2

I'm assuming that you got either a Form 1099-A or 1099-C from the lender. You may have a taxable gain from the Cancellation of Debt unless you were insolvent at the time of the COD. You are considered insolvent if your liabilities exceed the value of your assets at the time of the COD. Get a copy of Form 982 from the IRS website to claim insolvency if it applies to your situation.

Answer 3

They can as they could with any money. It's no longer "life insurance money." It's just "money." If the money came from someone other than your husband then the money would be protected from THAT person's creditors and it would safely get to you. Once it's in your hands then it is no different than any other money you may have. It sounds like you really could use the help of a financial advisor. Trying to raise children on hip shots and hope doesn't work really well. Perhaps you're behind on the payments needlessly.

Answer 4

This is weird for a lender to do that. I would run this by your tax man, or even call the IRS for advice.