1099 after a short sell?

Question

If I short sell my home for $50,000 less than what is owed, the bank will then submit a 1099. What does this mean exactly? Will I be paying for an extra $50,000 income or is this essentially a bill from Uncle Sam for $50,000?

Answer 1

When you receive the 1099 from the lender for $50K, the IRS also receives a copy. You are expected to add the $50K to your taxable income in the year in which you sold the house. While not subject to Social Security tax, you will pay federal and state income taxes on that amount. If you are in a 25% tax bracket, this will cost you $12,500 additional federal income tax for that year, plus whatever percentage your state income tax is.

Forget the comment about rolling the $50K into a 1031 exchange. Those exchanges are only for 'like kind investments' and your house didn't qualify as an investment in the first place.

Answer 2

Technically, you sold your home, be it even for $1 less than its value. In a short sale, cancellation or forgiveness by the lender of the debt usually means the debtor has reportable income. That can be disastrous since you are taxed on the canceled/forgiven amount like you get taxed on your pay. Most people fall into the 20-30% range.

I don't see how you could utilize a 1031 exchange if you're an average person and you're short selling. A Starker Tax Deferred Exchange may be applicable.

Answer 3

the 1099 would be for forgiven debt and you would claim that on line 21 of your 1040. this would add 50,000 to your taxable income and most likely bump you up in tax rates.

Answer 4

Income - unless you roll that into another investment with a 1031 exchange.

Answer 5

It is just taxable income. You received the actual money when your loan closed.

Answer 6

to avoid confusion, a 1031 does not apply to your primary residence.