Got a Form 1099-C? Now What?

This post is in: Business

1099CWe’re getting a couple of questions a day right now asking about Form 1099-Cs and Form 1099-As. What’s taxable? What’s not? What do you do if you don’t have the money?

Here is a recent question:

Hopefully you can help me out here. I was one of the unfortunate ones that purchased a home in January of 2006. The home was purchased in Floida (Palm Beach County) and I homesteaded there in March of 2007. Due to the economic downturn, the company I was working for went out of business and I was unable to find adequate employment in South Florida. My house lost 50% of its value so I was unable to sell the property without going through a short sale. I am currently living in New Hampshire and am closing on my property in Florida next week. I have an 80/20 mortgage on this property. The first mortgage is roughly $480,000 and the second is roughly $120,000. The house is being sold for $310,000. I am paying $20,000 to the first lein holder who is in turn paying the second lein holder $16,000. Both the first and second lein holders have stated that they are forgiving me of the remaining debt but will be sending me a 1099-C. I had heard at one point last year that the government was forgiving homeowners that had to do a short sale on their primary home. Is this the case? Will I need to pay taxes on the forgiven amount (roughly $300,000)? Where can I find out more information on this?

You’ll probably want to review Publication 4681, available online from

If the loans were qualified mortgage indebtedness, (which means you haven’t refinanced and pulled out other cash & you lived in the homes for 2 of the previous 5 years) then most likely you will NOT have tax due on this cancellation of debt (COD). Because this happened in Florida, which doesn’t have a state income tax, you don’t have to worry about state law either.

For others, not all states adopted the 2007 Act that gave us the exclusion on COD income for principal residences. The exclusion is only through 2011, but you’re well within that time limit as well.

The one thing you MUST do is include a Form 982 with your tax return in the year that you receive the Form 1099-C. If you don’t, you’re telling the IRS that the COD income will be subject to tax.


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  2. Myrna says:

    I don’t get it. My husband received a 1099-C for tax year 2009 on the difference of his property that he sold in a short sale. He submitted a Form 982 for that one. Yesterday, he received another 1099-C but for tax year 2010 but this time, for the entire amount of the outstanding loan, not just the difference. What’s up with that? Does he fill out another Form 982? Could this be an error on the creditor’s part? What should he do? Thanks in advance for your help.

  3. Diane Kennedy says:

    Ann, I think that’s the best plan for you. It’s tough, I know, to think of the money that you’ve put into the house and that is no longer there. For what it’s worth, there are millions of other Americans in exactly the same boat.

  4. Ann says:

    To be honest I am not sure if we rent this place out, if there is a deficiency judgment. But, renting, does not be a personal option for us. But, I am thinking if we rented our Primary House, and rented as long as we did not walk, and dealt with tenants, we might be ok. We just are not up to property managing.

    2. WE are considering walking on the house for a couple of reasons. We purchased it for $260,000. Put a ton of money in it, and now it is worth probably $180,000, from what I have been told. We owe $206,000. No, we do not have a cash flow issue, that is the problem. My husband makes good money and I did up until a year ago, now my income is maybe $20,000. If we moved to the other cuonty, my husband would not have to drive a hundred miles a day, and my job opportunities are much better. I have to say too, that I will be 60 in another year and plan on ccllecting a small pension. I will probably work very part time, so I was trying to get all my ducks in a row, so that my husband, would not have the entire financial burdern. The most recent plan: give up the thought of moving, pay for an appraisal and get the taxes dropped. and keep the house up for sale, We do not see any other way out…

  5. Diane Kennedy says:

    Thanks for the additional info Ann. A couple of things I’m not quite sure on:
    (1) If you do not rent the house out, can Chase still get a deficiency judgment? If they can either way, than that point is moot.

    (2) Are you considering walking on the house because you have a cash flow issue maintaining it or because it is upside down? If you have a cash flow issue hanging on to it, your question is really what’s the best way to get out of this. If the issue is that it’s upside down, it seems like it’s not that much upside down ($25,000). In that case, it’s probably not worth it to take the credit hit.

    Because you don’t have a lot of other upside down real estate, bad debt, bad businesses or frivilous lawsuits after you, there doesn’t seem to be any purpose to bankruptcy. So the question is whether to walk on it or not.

  6. Ann says:

    I did learn through a bankrupcy lawyer, in MI, the following: 1. Rent: Changes our status on our home from Primary to Secondary, since we will be living in the rental. (I did not think this was the case sense we were not buying another home. 2. Chase, can come back at us for the difference. (They can get a deficiency judgement in the state of Michigan) As a result we can be held liable 3. He said Chase would never give us a Short sale since the anticipated FMV, is close to what we owe by $25,000. 4. We could file for bankruptcy, Chapter 13 and pay around $445.00 a month x 5 years, and be done with it. (Well, who wants to do that) Basically, he told us, our mistake is that we are responsible people! I do understand that a Bankruptcy lawyer is just that. He is in the business of making money with bankruptcies, so I don’t know where to turn. What is true???? I hate to turn down the rental, but I am thinking we have no choice.

  7. Diane Kennedy says:

    Ann, the question you need to ask someone in your area is whether a lender can get a deficiency judgement against you in Michigan on a principal residence. I don’t want to give you the wrong advice here and strongly urge you to talk to an attorney about this. I am concerned that there might still be liability to you and you need to know that before you make any plans.

    Generally speaking, and assuming there is no fraud, your retirement funds are safe from judgements and even protected in the case of bankruptcy.

  8. Ann says:

    We are in Michigan. We have decided to rent, for a few years. The goal is to keep our house Primary. I was also reading where Chase can not tap into our long term retirement fund? True? 401’s, deferred comps. etc

  9. Diane Kennedy says:


    I’m sorry to hear about the troubles you’re having with your house. Unfortunately, there are a lot of people in exactly the same situation these days.

    As far as the credit hit, you absolutely will take a credit hit for it. I heard that over 25% of all Americans now have credit scores under 580 (which is considered poor). So again, a lot of people in the same boat. Can your credit come back? Absolutely! I know people who declare bankruptcy and are able to buy a house in 2 years. So it possible to come back from the bad credit hit.

    Can the lender come back? This is something you need to check on with a lawyer. It depends on state law. Some states like California and Arizona, I know, are very specific in that they can not come back to you for a deficit.

    Do you continue paying taxes and insurance? I guess the question is what is your intention? If you want to try to work out a deal with the lender through a loan modification, you probably do want to continue the taxes and insurance. Again, I suggest you talk to an attorney in your area.

  10. Ann says:

    Almost had our house sold but the offer was $20,000, less then what we owed. We considered it, and by the time we agreed they found something else. We are seriously considering moving out of the Primary resident and rent for a while. As a result stop payments. We have had the house up forever, and nothing. 1. How bad can we get hurt from walking away from this nightmare 2. Can they come back on is, since we make a decent income. 3. Even if we stop payments should we continue to pay the taxes and insurance? We also pay city tax, should we continue paying City, even though we are living in a different county?

  11. Jules,

    That’s a great question. If you had been renting the property and nothing changed (ie, you started fixing it up), then it is still in service. But since you cleaned it out and stopped trying to rent it, the IRS might make the argument that it was taken out of service.

    If it were me, I would put furnishings back in there or do SOMETHING that made it rentable and start placing some ads. Get it back in service and then deal with the D-I-L which may or may not happen. (Generally we’re seeing that banks won’t do them if there is a 2nd on the property – they would rather wait for a foreclosure. And even then, they are incredibly slow to take a D-I-L if the market has seen a big decline)

  12. Jules says:

    Thanks Diane. Can you define “in service?” The property was rented periodically as a furnished corporate rental (typically a few nights a month) until July 2009. At that time, the bank made a Deed in Lieu offer, contingent on the property being empty. We promptly cleared the property of furnishings, rendering it unrentable through the corporate program. Then the bank failed to provide the DIL paperwork until last week, so its been unrented for a little over a year, all in anticipation of settling the DIL issue. Does this sound like it would qualify as “in service?”

  13. Ann says:

    Hi Diana, after reading more info on Foreclosures, Secondary vs Primary….We decided to keep the house, and wait until it sells… My new question is this. Recently, Obama said, the refinancing rules should change, IE drop the Principle and or decreased interest rate…Do you forsee that really happening. Our house, purchased at $260,000, is probably only worth $180,000…

  14. Diane Kennedy says:

    Jules, I’ll run through an example with your numbers, but remember you’ll have to also recapture depreciation and be able to free up any suspended passive losses on the property.

    Ok, so let’s say the property has a basis of $158K. The loss on the property will end up being $123k, as you stated. The COD income will be $107K. COD income goes on line 21 of your Form 1040 (unless they change the form for 2010) and the loss will be a Form 4797 loss, so it’s fully deductible. If the property was NOT in service and was just an investment, you could run into problems with this being considered a capital loss….ie, only deductible to the extent of capital gains plus $3,000. (In other words, you would probably only get $3K of the loss against your COD income in that year – not a good situation)

    The difference is whether the property was in service or not.

  15. Jules says:

    Hi Diane, this blog is a huge help. I have a property in Florida I purchases as a rental property for $168K, current loan value is $152K, current market value is about $45K. Just worked out a Deed in Lieu with the bank, for which they say they will not seek deficiency & send me a 1099. I’m not insolvent or bankrupt. If I follow you from earlier posts, I’ll get a 1099-C for $152-45=$107K in income, but will be able to offset that with the $168-45=$123K in capital loss. Am I looking at that the right way?

    Sure appreciate your insight.

  16. Shelly says:

    It is a non-recourse loan, so my understanding is that I dont have to report COD as other income on non-recourse loans.

    I live in VA and I have talked to a CPA here and I knew more than they did. The property is in CA so most likely have to talk to CA CPA, no one here understands the CA laws on non-recourse loans, etc.

  17. Diane Kennedy says:

    Are you taking an Insolvency or Bankruptcy exemption on Form 982? If not, then you don’t need to adjust basis.

    Form 4797 reports the full basis. Other income reports the COD Income. The only time COD affects basis is if you’re taking the exemption on Form 982.

    You may need to review this with a CPA prior to filing. It’s a complicated area and there is a lot of misunderstanding around it.

  18. Shelly says:

    Sorry for dragging this out, I am wording my question wrong… on Form 4797, line 2 (f) It asks for the cost of the property or other basis. This is the number I am confused on.

    I know what I paid for the property but I will only be reporting line 2 (e) a Sale of only 80% (since that is all they actually will give me a 1099C for in year one) So if the bank is only giving me a sale of 80% so I only report a cost of 80%. Then in year 2 report the remainder when I get that 1099C?

  19. Diane Kennedy says:


    If you’re not using an exemption from Form 982 that requires you to reduce basis, you don’t need the basis amount for reporting the COD income.

    Assuming it’s a rental property:

    (1) Report gain/loss from disposition on Form 4797.
    (2) Report COD income as other income on page one of Form 1040.

  20. Shelly says:


    I understand that I reduce my basis by the COD amount and recapture the depreciation. Guess that wasn’t my question. My question is how do I calculate my basis when they are doing two different 1099C in two different years….

    In Year one they would have only gave me a 1099C for 80% of the cost, so would that be my basis (Full cost * .80)? Then in Year 2 I would get a 1099C for 20% of the cost, so would I then use 20% of the cost as my basis for that year? Thanks so much

  21. Jeremy Taylor says:

    Thanks for your patience and help…

  22. Diane Kennedy says:

    Jeremy, don’t do anything unless you get a Form 1099-C. My guess is they won’t send you one, so you don’t need to do anything.

  23. Jeremy Taylor says:

    It is in Las Vegas, NV. So if i’m getting this right, I should file a form 982 when I do my taxes for 2010? Will there be a penalty for not doing that for my 2009 taxes?

  24. J dancer says:

    Diane, 3 questions on Form 982,

    There is the exclusion choice in Part I of Qualified Business Real Property;–does regular SFR rental property normally listed in Sch E, fall into this category? i.e. is this a business? –all the examples in the instructions and the PUB all discuss a retail store.

    then in Part II, there is line 4 to report the reduction in bases of that Qualified Business Real Property, but line 5 also is the option to reduce basis in property; what is the difference bet lines 4 and 5 of Part II of 982?

    If you use the Insolvency exclusion, can you use line 4 to reduce basis, or do you have to use line 5 or does it matter?thanks for your help.

  25. Diane Kennedy says:


    I didn’t realize this was your principal residence. In that case, what state is the property located in? You will definitely get the exclusion for federal tax purposes (file the Form 982), but need to check to verify if you will receive it for state tax purposes.

  26. Jeremy Taylor says:

    Btw…we did not receive a 1099-A. Thanks for your help

  27. Cyndi says:

    I am in a similar situation but in West Virginia. We bought vacant land in an up and coming private development. The development was never completed and we foreclosed on our property. We were sent a 1099-A last year and noted it in our taxes. Do you know the laws in WV? I feel like a weight is over our heads and we’ll get a 1099-C and then owe a ton of taxes.


  28. Jeremy Taylor says:

    This was our primary residence. We had no other properties. Does all of this still apply?

  29. Diane Kennedy says:


    I have a client in exactly the same spot and they learned the same thing from their attorney – NV has 90 days to enter the judgment. So, you probably are in the clear.

    The thing I’m puzzled about is that you didn’t get a Form 1099-A either. Did you ask them specifically about that?

    Generally, the process is to report the sale on Form 4797 (assuming this was a rental property) – the FMV shown on the Form 1099-A is the sales price and you report your basis and recaptured deprecation. If they never give you a Form 1099-C, you never have COD income. If you do get it, the loss from Form 4797 should offset it. Or you may also qualify for an exception due to insolvency or bankruptcy. (File the exception with a Form 982).

    Sorry to give you so many tech data…this is something you probably want a pro to help you file if/when you get a Form 1099-C. Meanwhile, make sure you report the loss.

  30. Jeremy Taylor says:

    Thanks for the quick reply. All we ever received was a letter from their attorney informing us the house was in foreclosure. After research, we learned it was resold. To my understanding, Nevada law requires the lender to enter into a judgement within 90 days after foreclosure if they are not going to forgive the debt. When I called them they said they were way backed up and if I hadn’t heard then most likely they aren’t coming after us. We lost our job when the bottom fell out.
    But I am worried of the tax implications without having a 1099-C yet…

  31. Diane Kennedy says:


    Did you get a Form 1099-A on the initial foreclosure? I’m finding that a lot of lenders are not issuing 1099-Cs, which implies that they don’t intend to write off the debt. But they’re doing it in cases where they have no recourse due to state law.

  32. Diane Kennedy says:

    You need to reduce your basis by the COD amount and yes, you need to recapture all of the depreciation.

  33. Jeremy Taylor says:

    We had a foreclosure in Las Vegas that was formally resold in October of 2009 and we have yet to receive a 1099C. I did call the lender to make sure they had my most recent mailing info. What do I do?

  34. Shelly says:

    Just to follow up… then what would my basis be in Year 1. Normally it is the cost of the property minus depreciation. But in year one they would have only gave me a 1099C for 80% of the cost, so would I take that minus 100% of my depreciation. Then in Year 2 my Adjusted basis would only be the 20% of the cost with no depreciation? Thanks so much.

  35. Shelly, if I am reading this correctly you have one property with two loans. You believe you will get two 1099-Cs (ie, they are cancelling debt on each) but that they may be in two calendar years.

    If that’s the case, then yes you will report in two years.

  36. Ann, if it’s not a principal residence, you won’t get that exemption. You may qualify as insolvent or if you declare bankruptcy, however.

    The key is to get with a qualified tax CPA to find out whether this will qualify as principal residence or not.

  37. Shelly says:


    I bought a property with an 80/20 loan in CA. I lived in for a few years and then relocated and turned it into rental property. Since then I have had to let it go to foreclosure. It was foreclosed on in Jan 2010. My primary loan is showing closed and since it is CA and it was a non-recourse loan I am assuming I will receive a 1099C on that. The problem is the bank is not closing the second loan, there was insurance on the loan and they said they will not close it until they finalize fighting for insurance money. Therefore I dont believe I will get a 1099C on the second loan. 1) Can they do that when the property was foreclosed on in Jan? 2) If so, how would I do my taxes for 2010 & 2011, would I just report the one in one year and the other in the next year? Also, not sure what the tax implications on that will be.

  38. Ann says:

    Hi Dianne, Ann again in response to your comment. “Since it is your Principle REsident…You do not have to pay Federal or MI state tax…” What if it becomes your secondary home. Have tried for 2 years to sell, and you walk. What then?

  39. Dianna, just spotted your other question as to when the lenders will give you the Form 1099-C.

    They are supposed to give them to you by Jan 31 of the year following the year in which they forgave the debt.

    This is where the loophole for many of them is – when they FORGAVE the debt. So just because you left the house and the foreclosed, they still may have not forgiven the debt. Depending on the state, they may have 4 or more years to collect on the debt.

    There is no Form 1099-C if they didn’t forgive the debt.

  40. Ann, I’m sorry that you’ve gotten stuck, just like so many other Americans today.

    I can’t really speak to whether it’s best to try to renegotiate or walk on the property. But let me put your mind to rest regarding the tax issues.

    Since it’s your principal residence, you do not have to pay federal or Michigan state tax on the COD (cancellation of debt) income if you do decide to leave the house.

  41. Dianna, just go to the IRS publication/instructions for Form 1099-C. It lays out when lenders need to prepare the forms.

  42. Ann says:

    We purchased our home 5 years ago, for $260,000, in Michigan. Like everyone else, our house value has dropped, last check $210,000, but that is a guess, it could be lower. We are paying approx $18,000. a year to live in this home. We have tried selling the house, on and off, for the past 2 years, with min. interest & we are on water property! We had a slight possibility with a Land Contract buyer, but Chase would not give written approval. So, that possibility died before it got started. We are living in limbo: we don’t want to put anymore money in this house (have already spent $50,000 plus on improvements). The house is eating up our retirement money and it cost a fortune to drive back and forth to work… We are thinking of letting it go back to the bank. Yes, we did refinance this year via the Hart Program, but that dropped our payment only $150.00 a month. I have called Chase and they wouldn’t do anything, because we are not financial strapped. Our goal is to downsize, and save the money we are loosing in this house. We have also talked to mortgage reps, who tell us, it is silly to refi, since it would require an appraisal, and our house would be less then we owe… People in our area are foreclosure, decreasing the value of our home as we speak.. Like so many, we are good people with good credit, but it does not make practical sense to continue to make exorbitant payments, knowing we will never get it back. We are afraid, of hidden repercussions, 1099 etc. We are approved to buy a second home. We have considered this because we live so far from our jobs. Gas alone would be a savings. Any advice?

  43. Dianna says:

    Hi Diane…

    One more question…where can i find the publication that states its a federal law required by IRS for lenders to file the 1099C

    thanks again,

  44. Dianna says:

    HI Diane…
    great blog here. I live in the state of Florida, how long do the lenders have before they send you a 1099C, I have heard 4 years some 5 and do they have to send it to you by Jan 31 of each year just the same as W-2’s. 1099’s ect?

    your help is appreciated!!


  45. Diane Kennedy says:

    Louisa, first of all, I am so sorry for what you’re going through.

    Not sure if it helps, but know that there are a lot of others in the same boat today.

    Some things I’d suggest you explore with your CPA:
    (1) Even though your scammer didn’t go to jail for this particular fraud, was there a plea or was it part of the deal? Is anyone prosecuting? We had a couple of clients in a very similar spot. We were able to claim fraud in the inception, which means the whole deal basically unwinds and you get a big loss that offsets any potential COD income. Take a look at that.

    (2) If we could consider the property ‘in service’ there would be a loss on the property that will likely more than offset the COD. Question for your CPA: What would it take to put this property ‘in service’?

    (3) Insolvency means that your liabilities are greater than your assets. My guess is that you might not qualify for this, but you’ll need to go through the entire IRS insolvency worksheet with your CPA.

    (4) It may be possible to keep the tax issue just with you. This is going to depend on the state you’re in, whether you used commingled assets and how title is held. Again – one more thing to talk to your CPA about.

    My overall thought is that you just need a good CPA. There are enough possible solutions here that something is bound to work out.

    If you’d like to work with my firm, just drop an email to or contact us through phone, fax, mail – all on the “contact us” page of this website. (Look above at the tabs)

    Hang in there.

  46. Louisa says:

    Diane, great information! Thanks for your generosity!

    Long story short:
    got scam and signed a loan document for a 1.2 million house in Florida. I lived in California. The 2 loans are about 1.1 million+ 2 years expense. The scammer were sent to jail with other similar scams for 15 years. My case wasn’t included.

    I signed the loan document by myself. My husband is not on the loan or title. My husband is doing okay with his jobs. I am not working. We have some asset and couldn’t file bk. I have a lawyer trying to help me to short sell it. But told me to prepare for BK.

    Even if no deficiency, most likely I might get a 1099. The bank attorney knows my situation, but with about 370,000 sale, they might still give me a 1099.

    I have not seen the house, nor rented the house out. If I can’t file BK, how do I prove insolvency? Can use insolvency alone while we filed join tax turn before?

    I am really scare of that 800,000 or more 1099. My husband make about 250k, this year he might do 300k. But it could all be nothing. Can you give some advice or recommendation on CPA!

    Thanks so much!

  47. Joel says:


    We had an investment property foreclose in Florida in 2009 but have not received any 1099 forms as of yet. We were only listed as owners during construction and the loan never closed to a permanent mortgage. How long does the bank have to issue a 1099 to us?

    We have an rental property in IL that is in foreclosure proceedings and this property is on the market now.

    We are trying to decide if insolvency or BK is the right route.

    Any insight or advice would be appreciated.


  48. You probably will want to get an expert to help you. The necessary form is Form 982.

  49. Alec Shapiro says:

    My wife and I are on the second home mortgage.
    After short sale we will have 1099-C for $75000.
    My wife had a bancruptcy on this praporty.
    How to fillout TAX return to reduce IRS payment?

  50. Eddie says:


    First of all I have to tell you that your blog is by far the most helpful one that I have found.

    My Question:
    I am short-selling my rented investment property in Florida.

    I purchased it for $216,000, the short-sale price is $74,000, and the amount of my 1099-C will be $98,000 ($172,000 owed less $74,000 from the short sale).

    My question is how to avoid or minimize the tax implication of the 1099-C. From some of your prvious blogs I am assuming that since the proprty is and has been in service (rented) I can off-set the loss on disposal with the 1099-C. Is that correct? Is there an IRS publication that further explains this to me?

    Thanks for you help… Eddie

  51. jdancer says:

    Diane, see my question from June 22—does 1099C income still get reported on 1040 as INCOME, even if you have 982 exclusion, and report the sale on 4797 with reduced basis? and yes there is a capital loss that washes out the income.thanks.

  52. Diane Kennedy says:

    Richard, drop an email to my husband He can set up a time to talk you through the issues and get you a good CPA referral. It IS very tricky, I agree.

  53. Richard Rangel says:

    I live in CA…..Irc code allows for insolvent but I believe Ca in nonconforming with only ocupied home. Funny part is that the homes rentals where in Arizona. I believe Az is conforming with insolvency. Im so confused…..If Ca gets a hold of me that I belong to them on the so called phantom tax I will owe 60k…Pleae send me to someone or prepare me for my 2010 taxes…

  54. Diane Kennedy says:

    JW, in your case, you likely have a loss from the ‘sale’ (ie, disposal) of the property that is going to more than offset any taxable income from the cancellation of debt.

    Let’s say you paid $200K for the property, put 10% down and it’s now worth $90K. So, you’ve got debt forgiveness of $90K.($180K loan minus $90K value) But you’ve also got a loss of $110K. ($200K less $90K) So you won’t need to use the Form 982 exclusions.

    Make sure you take a look at the blog post on Wednesday (6/23/10) which lists states that are not allowing the Form 982 exclusions. Moot, I think, for you – but good info to know.

  55. JW says:

    We are in the process of doing a deed-in-lieu of foreclosure on an investment property in Florida (we live in NY). Values have dropped substantially. I understand we can be issued a 1009-C for the difference in amount we owe on the mortage and the amount the bank ends up selling it for, correct? Should we be filing a Form 982, and what exactly does this form do for us? Is there any wording we can put into the legal documents before we sign off on the DIL in order to avoid the 1099-C and impending tax consequences?

    Thank you very much! Great website! Finally some information we can use.

  56. J dancer says:

    If you qualify and file a 982, Does the 1099 C debt cancellation income still get reported on the 1040 form under income? or NOT, and would you advise to paper file with some record showing insolvency?

  57. Diane Kennedy says:

    Alec, not sure what you mean by ‘better’, so can’t really respond to this.

    As far as how much you will owe, that will depend on a lot of factors such as other income, expenses, deductions and the basis in the property. I suggest that you talk to your accountant about this ASAP so there are no surprises down the road.

  58. Diane Kennedy says:

    Christopher, your uncle will report the ‘sale’ of the property using your basis. If the amount that you owed equals your basis, you’ll end up with a loss equal to the cancellation of debt income.

    If the basis is more, then you’ll have more loss.

    If the basis is less, then you’ll have less (and that means tax.)

    It all depends on how much your basis in the property is.

  59. Alec Shapiro says:

    My wife and I owe $130,000 on a MI rental/investment property.
    I stop my payments in July 2009 and was ready for a Foreclosure. My wife had a buncruptcy in 2009 for this property. But at this time we have short sale offer for $55,000.
    So I will get a 1099-C for $75,000.
    1 Is short sale like this better than Foreclosure?
    2 Can we avoid payment to IRS and if not can you estimate how much we will owe?

  60. Christopher says:


    Very informative blog thanks!

    Owe 68,000 on a Michigan rental/investment property, Short sold it for only 10,000.
    I anticipate getting a 1099-C later this year for 58,000. How do I avoid having that be taxable income and owing alot to the IRS?
    Will a Form 982 help?
    I havent contacted my CPA yet because he’s my uncle and I’m frankly, embarassed. 🙁

  61. Diane Kennedy says:

    Patricia, let’s step through the details of what you have told me so far:

    “I bought a home in nov 2006 in Arizona for 269k. The property is valued at $160k now.”

    Since it’s now an investment property and it has been put in service, you will have approximately $109,000 in loss when you sell or do a D-I-L on the property.

    You didn’t say how much the debt was, but let’s assume you have a loan of $260,000. If the value is $160,000, you will have cancellation of debt of $100,000 that is taxable.

    So – a loss of $109,000 offsetting income of $100,000 – you should be in good shape.

    Of course, I’ve just made some broad assumptions on the numbers You could have different facts.

  62. Diane Kennedy says:

    Ricky, I understand now. You are not required to submit the worksheet. Just make sure you complete Form 982 correctly.

  63. Patricia says:

    I bought a home in nov 2006 in Arizona for 269k. I lived in it until aug 2008, a little under 2 years. The rent on the property only covers half of the mortgage, and I do not qualify for refinancing or loan modification. I am trying to do a short sale but I am afraid of getting taxed on the 1099c of about 100k. I am currently on unemployment, and the property is valued at $160k now. Is there any laws out there that protect me from being taxed on the 1099c?

  64. ricky says:

    taxact includes the form 982 but not the worksheet to show the insolvency. Some have said it’s best to mail the return with something to show insolvency.

  65. Diane Kennedy says:

    David, I suspect that the Form 1099-C will be a 2010 form. BUT to be safe, I would file an extension now and then see what it is. Why go through the extra work (and extra chance of audit) with an amendment if you don’t have to!

    Ricky, the problem with do-it-yourself software is that it often doesn’t have the right forms if you have anything outside the norm. From what you’re saying, I’m concerned that the Form 982 is not being properly prepared. You need this form.

  66. david says:

    I did a short sale on my house on 2009. Bank did not send 1099-c. two loans 80/20 same bank. I called they said it will take 4 to 6 weeks to get them. Should i just file an extension for the federal and state taxes and wait for the 1099-c??
    Is it better to send a amendment for the taxes later??

  67. ricky says:

    I received a 1099C and claimed insolvency by using the form 982 insolvency worksheet. I used an online tax preparation site to file electronically, but haven’t filed yet. It’s not icluding the worksheet in the efile, is better to mail the return with the worksheet included? thanks.

  68. jerry says:

    we short sold 3 spec homes using the same lender one i took out the loan with my corporation, recived a and a letter stating that the debit was forgivin, & a 1099-c. the other two my dads corporation took out the loans they made him secure a note for some of the shortfall aginst some rental properties he owned he recived a similar letter to mine and paid the note off, however he never recived a 1099-C obviously cost cancels gain but what do we do without the 1099-c

  69. Amber, you’ve got very good questions here. I can’t think of a reason why the 2nd mortgage company wouldn’t issue the Form 1099-C, unless they are NOT forgiving the debt and plan to come after you. The Form 1099-C is cancellation of debt. But if they agreed to the short sale, they must have agreed I think.

    I would file with the first Form 1099-C and then attach a statement that says that bank XYZ forgave a note in the amount of $XXX. They did not issue a Form 1099-C for this amount.

    If you’re filing a Form 982 to exclude the amount from income, don’t include the amount from the 2nd. If you do get a form next year (which I can’t imagine them doing but who knows), the file the Form 982 again to exclude the amount from income.

    When in doubt – disclose!

  70. Amber says:

    Diane – we did a short sale on our primary residence in 2009. We had an 80/20 and both banks agreed to forgive our outstanding deficienys/debts. We have already recevied our 1099-C form from the first mortgage but never received one from the second mortgage. When we called them to inquire about it recently they stated that one had not been issued. So I have three questions, 1. should we go ahead and file our 2009 taxes without the second 1099-C form or 2. should we wait to see if we do receive one later even though the deadline for them to issue one has past or 3. is there a chance they will end up issuing one later in the year or even next year in which case should we include it on next year’s tax return and will this have negative effects being that is a year late? THANKS!

  71. Tania – Someone at Aurora gave you wrong advise. It’s possible that they misunderstood or who knows, maybe that’s how Aurora is handling it.

    The Form 1099C is when there is cancellation of debt – which could happen for DIL, short sales and foreclosure. Or maybe Aurora is saying that they don’t cancel debt in case of a foreclosure.

    Either way – interesting that the IRS told you to report the Form 1099-A. I’m taking the position that you should do it anyway and do the Form 982 on Form 1099-A, although I didn’t see that was required in the instructions.

  72. tania says:

    I called my lender, Aurora Finance and the stated that the 1099A is for foreclose properties and 1099C is for short sales or Deed in lieu of foreclosure. Also, the IRS stated that in a 1099a you file as a sale of a home schedule D capital gain. In which you would use the purchase price plus closing cost, repairs etc against what you owed. 1099C you would have to file form 982 if you were insolvent before the foreclosure. Is this correct?

  73. Pam, you’ll need to file a MI state return along with your other state return. You file as a nonresident for MI, so only the income from the house will be subject to the tax.

    This is one that you might want to pay someone to help you with. Remember, no matter what, to file Form 982. If you don’t, this will all be taxable.

  74. pam says:

    Thank you that is good news. Now if I did not live in MI last year and do not file a MI state return how do I handle this income for that state? I get the federal.

  75. Shouldn’t blog and watch American Idol at the same time…. I meant to say MI passed its own version of debt forgiveness EXCLUSION. ie, most likely no tax due.

  76. Pam, good question. I haven’t addressed that all, I just realized.

    Yes, if you sold the property in MI, it is MI income. And luckily for you, MI has passed its own version of debt forgiveness.

  77. pam says:

    Do you claim the cancelled debt on a 1099 C in the state the property was located? Short sale on house in MI, moved to KY due to job loss

  78. Thanks for the info Cyndi. 10 years in WV is brutal! I believe it was only 5 years in California. Still, just in time for the economy to recover…

    Your accountant is right – the Form 1099-A means they have not forgiven the debt BUT in other notices the IRS has stated that it does need to be reported. My inclination is to always report and disclose. If you file the Form 982, the worst thing that can happen is that you filed it prematurely. If you do not file the Form 982, you might have lost the opportunity to do so.

    My biggest concern is that the banks are in such a mess from the buy-outs, mergers, etc that they often don’t know who has what. They could very well send a Form 1099-C to the wrong address, years later, and you suddenly get hit with a tax and penalties on something you didn’t know about.

    If the lender does give you a 1099-C, they will do it in the current year. So, if they send you one in 2011, then that’s when you report it.

    I still think reporting early is more cautionary, though.

    Does that make sense?

  79. Cyndi Beechler says:

    Doesn’t form 1099-A mean that they have not forgiven my debt? My accountant says that we need to just report it, but that’s it. Not add to total income unless I recieve the 1099-C.

    I also talked to a WV real estate lawyer yesterday and he said not to do anything. The lender has 10 years to come after me, but there is a change they may not. The different between FMV and my loan is $70K. According to him, that’s not a lot of money to a bank who probably has worst cases than mine to go after.

    I wanted to send a letter to the lender asking for debt cancelation/forgiveness so that we don’t have this hanging over our heads for 10 years, but according to this lawyer, why bother reminding them of the situation.

    As for form 982, to qualify, don’t I need the 1099-C form? Also, I would have to show that I do not owe enough assets to afford debt, right? Bankruptcy is the other option, but we are not going that route.

    Also, If the lender does ever send a 1099-C, would have to re-file my taxes for 2009 when I foreclosed or just add to income in the year they canceled debt?

    I would love your expert advice on this situation.

    Thank you again!

  80. The estoppal is something that you negotiate with the lender. That’s usually what you get them to agree to for you to give them a deed-in-lieu of foreclosure. On a regular foreclosure, you won’t get the estoppal. Or at least I’ve never heard of getting that.

    Report the debt forgiveness as reported on the Form 1099-A and file a Form 982 if it applies. Otherwise, the forgiveness will be taxable.

    You might talk to your real estate contacts in WV to get the name of a lawyer there. Some states have provisions that stop lenders from coming after borrowers. That could be the case here, in which case the estoppal isn’t necessary.

  81. Cyndi Beechler says:

    Hi Diane,

    Thank you for this blog. It really has the most answers I’ve found so far.

    Long story short, we purchased an investment property in WV and foreclosed in May 2009. I only received a 1099a form. After research and reading your blog, at this point I’m thinking we should file an estoppal. I’ve only first heard of this form from your blog.

    Can you please explain the procedure for this letter and how we can go about doing this? Also, I’m filing my taxes next week. At this point, do I just report the 1099a form and then file an estoppal so that they cannot come after me? After the estoppal, what are the implications for us?

    Also, I live in NJ and have no idea who to contact to guide me legally with laws in WV. Any ideas where I can find some sort of representation for WV?

    Thank you! Cyndi

  82. There are a lot of great questions and comments on this blog that I don’t want to get buried.

    I’ve started some more threads with specific information on investment properties, properties put in service, Form 982 exemptions and more at the forum under “General” on Real Estate Investments. Please comment there and we’ll be sure to see them.

  83. Roni, a foreclosure means you let the lender take the property. In the case of a short sale, the lender takes less money and facilitates a sale to another party. Both will mean COD that is taxable income.

    John, you may want to get some help on this. You need to file a Form 982. You get one shot to get this return filed right and if you mess it up, you could find yourself subject to a lot of tax.

  84. john says:

    My primary property was foreclosed in May 2009. I lived in the property for 5 years. I received a 1099A from my lender. Box 2 1,108,805.00 and Box 4 is 990,000 and box 5 Liable – yes. I will probably not get a 1099C. Which forms or worksheets will I need to fill out????? Should I attach the 1099-a to my tax return???? I am using HR Block tax software and cant find a 1099A form… I need some help…..

  85. Roni says:

    What are the different tax consequences between a foreclosure and a short sale on a rental property (that has been put in service?

  86. This is the part of the news that is tough. You can only offset capital losses against capital gains. Other than that, you’re allowed $3K per year in additional loss.

    The Form 1099-C income is COD income which means it’s ordinary income and fully taxable.

    Two possibilities: (1) If you can claim the property was put in service, then it’s an ordinary loss not a capital loss. (2) You were insolvent (owed more than you owned). If that’s the case, no tax due on COD income. File Form 982 w/ your return if that’s the case.

  87. Marc says:

    So overall the $160k on form 1099-c will offset the loss of $305k for a net capital loss off $145k on my tax return? What are the limitations on a capital loss?

  88. The $160K on the Form 1099-C will be taxable income to you. You also have a loss of $305K ($645K basis, sales price $340K)

    The problem is that just like the question above, the loss will be a capital loss.

  89. Marc says:

    I built a house on spec with the intention to sell it for a profit but never sold because the market dropped over 50%. My cost to build was $645,000. I invested $145,000 with $500,000 construction loan. The property sold at foreclosure for $340,000. The lender issued me a 1099-c for $160,000. Do I pay tax on the $160,000 or do I have a tax loss of $145,000?

  90. What about short selling a second home or investment property and you get a 1099-C. Is there a way to avoid income tax on the forgiven debt?

    The Form 1099-C will show the COD income, which is subject to income tax. In the case of a 2nd home, you don’t get to take advantage of a loss on the property. An investment will let you take that loss, but unless it’s been put in service as a rental, it’s a capital loss (and that is limited).

    Other than that, if you’re insolvent or file bankruptcy, you don’t have to pay the tax.

  91. “One more thing, should we be looking for an interest statement from Indymac as well? We did make some payments in 2009…..”

    Matt, you should get a Form 1098 for the mortgage interest you paid, plus don’t forget property tax. If you don’t get one, call them. They are required to furnish the statement to you, but they might have mailed it to the wrong address.

  92. Pat says:

    What about short selling a second home or investment property and you get a 1099-C. Is there a way to avoid income tax on the forgiven debt?

  93. Matt says:

    We have considered that a possibility. We still have contact with the new owners, so maybe we will check with them as well. One more thing, should we be looking for an interest statement from Indymac as well? We did make some payments in 2009…..

  94. Matt, just ran into this with another client. In that case, Indymac said they were going to issue a Form 1099-C (or perhaps a Form 1099-A) in 2010.

    I’d give them a call and find out what they’re doing. It’s possible that they did issue one but it went to the old property address or just got lost in the mail. The concern I have is that if you don’t file the Form 982 in the right year, you might end up with a state and federal tax mess.

  95. Matt says:

    What if we have NOT received a 1099-C from the shortsale lender (Indymac-closed July 09′).Can we still file the 982? Or should we be bugging Indymac to see if they intend on filing one?