Did You Get Your 1099 On Your Short?

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If you’re one of the unfortunate people who had to sell their home on short sale in 2010 because you owed more than what your house was worth, check your mailbox and see if the previous lender(s) have sent you a 1099 form to file with your tax return next month.  That form is evidence that your lender(s) forgave your debt when you sold the property. If you didn’t get the letter, you may be chewing your nails for years to come.

            Let’s say you sold your home last year for $200,000 but you owed $250,000. The Realtor who helped you sell the property worked with you and the bank to negotiate the mortgage down to a level where the home could be sold and not go to foreclosure.  It worked! You walked out of the closing without any money, but you also got out of $50,000 of debit. Um, maybe not.  Revisit your documents from the closing and the short sale negotiations with the lender.  But, IF the lender forgave the deficiency (of the $50,000 example), you will have a 1099 form that counts the $50,000 towards your ordinary income in the year of your short sale.  Not to panic because a law passed in 2007 allows the owners of primary residences to not pay taxes on that deficiency. Don’t quote me on tax matters though-talk to the IRS or your CPA.

            Here’s the nail biter: IF you didn’t get a 1099 a lender may be coming after you for that $50,000 in years to come.  Most people who are upside down on their home often have a first mortgage and a second mortgage. Lenders can file against you for the deficiency amount for up to six years after you sell your home. Lenders can file within three months to claim that deficient amount after a sale  if they have a first mortgage against you. If they don’t file, they lose the right to file. The second mortgage can take up to six years to file against you if they weren’t the one who initiated the foreclosure proceedings.

            If you think you may be haunted by a lender coming after you once your property was sold, talk to a legal professional. There are plenty of legitimate non-profits out there to help you get the facts.  You may have to consider filing bankruptcy to get rid of that debt. Whatever you do, don’t sit on your laurels and think just because you sold a home on short sale that you may be free of the mortgage debt. There are companies popping up all over the country going out to lenders and saying, “Hey, we’ll go after those former home owners for you!”.  And we all know there’s nothing worse than a debt collector calling you night and day, right?