Law Offices of Hilton Wiener Issues Tax Opinion to Real Estate Investor Stating
That a 1099-C Following the Settlement of a Foreclosure is Not Taxable Income
Some property owners have recently received a form 1099-C, others a form 1099-A, and others have
received notices from the IRS concerning their failure to include cancellation of debt income in a
prior year’s tax return. Real estate investors are often shocked to learn that they are not afforded
the same tax exemption as owners of a primary residence.
New York, NY, February 06, 2013 --(PR.com)-- There is considerable confusion among homeowners,
investors and even accounting professionals concerning the proper tax treatment of cancellation of debt
income. The tax consequences for short sale or foreclosure of a primary residence are clear, but the
investor or second home owner has greater problems. Compounding the confusion is that some taxpayers
have received a form 1099-C, others a form 1099-A, while others have received notices from the IRS
concerning the failure to include cancellation of debt income in a prior year's tax return.
It is not unusual for debts which are in default to be settled for less than the amount due, by payment of a
lump sum. Creditors often do this when they believe that they will have difficulty collecting the full
amount. Debtors, particularly those who are not filing bankruptcy, may find this preferable to attempting
to catch up by making payments.
The IRS considers the difference between what was owed, and what was paid to be income to the debtor,
and requires creditors to report this whenever the amount exceeds $600.00. The debt must be reported as
ordinary income on form 1040.
There are a number of situations in which the “income” is not taxed, the most significant being:
- Debts discharged in Bankruptcy
- Debts resulting from the foreclosure of a principal residence, or under the Homeowners Affordable
Modification Program. Note that this often discussed exception is not applicable to second homes and
- Debts forgiven when the taxpayer was insolvent (debts exceed assets)
More information about this is available from IRS Publication 4681.
If an exception applies, it can be claimed on Form 982, available at
http://www.irs.gov/pub/irs-pdf/f982.pdf , which should be filed with the tax return.
One question which the IRS does not discuss is the difference between debts that are cancelled and debt
which was the subject of a genuine dispute. Simply put, the settlement of a bona fide dispute for less than
face amount is not cancellation of indebtedness.
So what is a bona fide dispute? A taxpayer can be sure that raising the typical foreclosure defenses, used
primarily for the purpose of delay, will not qualify and will only result in a rather strong rebuke (and
penalty) from the IRS. On the other hand, the Law Office of Hilton Wiener has successfully issued tax
opinion letters where the particular facts of the case support it. Each case is different and the facts must be
thoroughly analyzed and well documented.
As with most areas involving tax planning, it behooves a client to get an attorney involved prior to
settlement of the lawsuit so that it can be structured properly in advance to enable the client to obtain the
desired tax position. 1099′s are being issued right now.
A real estate investor (especially one owning properties that are underwater), has much different concerns
than a taxpayer dealing with his or her primary residence.
Law Office of Hilton M. Wiener
100 Park Avenue
New York, New York 10017-5516
Web site: www.ReturnTheDeed.com
Linked in: www.linkedin.com/in/hiltonwiener
Law Office of Hilton M. Wiener
Contact via Email
Online Version of Press Release:
You can read the online version of this press release at: http://www.pr.com/press-release/471170