Expect guidance from IRS on the tax implications of short sales of homes… selling a property for less than the outstanding mortgage loan balance. Many states, such as Calif., bar lenders from going after borrowers for any shortfall on a short sale when the home’s value is less than the purchase-money mortgage on it. IRS has privately ruled that in this situation, the forgiven debt isn’t treated as income from a waived debt.
Instead, it’s included in the amount the selling homeowner realizes for figuring gain or loss on the sale, and if the house is the seller’s primary home,
up to $500,000 of the gain can be excluded. Because the issue is so important, the agency is now considering publishing a formal ruling that taxpayers can rely on. A break is on the way for lenders and debtors on debt cancellation income.
IRS will soon scrap the requirement that lenders must issue Form 1099-C to debtors when no payments have been received on the debt in the past 36 months. This rule has resulted in many mismatches with taxpayers and wasted the Service’s resources, because the trigger for filing the form isn’t based on the actual discharge of the debt. This will take effect once regulations nixing the 36-month rule are finalized next year.