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 irs.gov.
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.