Monday, April 04, 2011

Scott Free - Not Quite

Rocky shore at low tide in Satellite Beach.

Actually the phrase is "scot free". In modern usage it means getting away with something without penalty. If you sold a property last year as a short sale and didn't get a judgement from the lender nor a 1099 for the deficiency you may be thinking you got away scot free. Not so fast. As they say, there is no free lunch and, in the case of forgiven debt, there are only a few instances of "scot free" in the United States. The IRS considers forgiven debt to be income and as such it must be reported even if the lender did not issue you a 1099. The Mortgage Debt Relief Act of 2007 added exemptions for primary residences in tax years 2007 through 2012. Other exemptions are allowed for debt forgiven in the case of bankruptcy or insolvency, some farm debt and non-recourse loans. The majority of short sales I see in our market are likely not to qualify for forgiveness. So, this is a cheery April reminder that you need to consult with your tax professional before filing your tax return for 2010 if you had forgiven debt in the year even though you may not have received a 1099. Don't shoot the messenger.

As pointed out by a reader (thanks, PR), the fact that a seller didn't receive a 1099 from a short sale may point to the fact that the debt was not forgiven. If that's the case the short seller can expect someone, the bank or the entity that bought the debt, to pursue collection. They may wait a few years until the borrower is back on their financial feet. Read and understand those approval letters, people.

"It hardly matters if you're the smartest guy in the room when you're the most well informed" anon