The San Diego Union Tribune reports that mortgage defaults have fallen to a six year low in San Diego.  This is attributable to the rising presence of short sales according to DataQuick President John Walsh.  Mr. Walsh says that, “during the past year, we’ve seen short sales overtake the foreclosure process as the procedure of choice to deal with homeowner distress.”  This means that the reduction in mortgage defaults should not necessarily be seen as a sign of an improved local economy.

Ordinarily, the debt forgiven by a lender in a short sale, where a home is sold for less than what is owed to the lender, would be taxable income for the borrower.  The lender would normally be required to report the amount of debt forgiven to the IRS and issue the borrower a 1099-C.  However, thanks to the Mortgage Debt Relief Act of 2007, taxpayers are generally allowed to exclude income from the discharge of debt on their principal residence up to $2 million.

This is one of a few exceptions in which cancelled debt is not treated as taxable income.  In most other situations, forgiveness of debt will be treated as income.  Some other common situations where forgiven debt may not be taxable are:

• Bankruptcy
• Certain farm debts
• Non-recourse loans.

Tax attorneys, such as San Diego-based Janathan L. Allen, APC can help you determine if a 1099 you received is proper.  Additionally, Janathan L. Allen, APC can help you determine whether you should be issuing a 1099 if you have forgiven debt.

For assistance with 1099s or any other tax or legal needs your business may have, please give us a call at (866) 493-5400 to schedule a complimentary, initial consultation with one of our legal professionals.