Taxpayers who experienced a short sale or foreclosure during 2009 are receiving 1099 Forms from the lenders.
Lenders are required to report information to the IRS about debt cancellation in a short sale or foreclosure, but that doesn’t mean the amount reported is taxable income.
Sometimes the 1099 forms are wrong. They should be confirmed.
If the debt was non-recourse, the amount of the debt is reported as sale proceeds.
Exclusions may apply for “qualified principal residential indebtedness” or if the debtor was bankrupt or insolvent.
See my article on this subject at http://www.realestateinvestingtax.com/shortsale.shtml.
Special disclosure should be made with the income tax return when the amount reported for cancellation of debt is different from the 1099 Form. These are unusual transactions that could attract IRS attention, resulting in a tax audit; so be prepared!
The 1099 form is just the starting point for reporting cancellation of debt income. This is one time that hiring a professional tax return preparer who is familiar with the rules can be a worthwhile investment.