Let’s try to simplify this as easy as possible and not make this a complex subject. In most cases after a completed short sale (foreclosure) you’ll receive a 1099 from the bank/lender for the remaining balance of what’s owed. I’ll give you a quick example; Say you owe $100,000 dollars and your property sells as a short sale or foreclosure for $60,000 dollars, that means you’ll receive a $40,000 dollar 1099 in most cases from your lender/bank. What this means to you is when you go, and file your tax returns this newly found $40,000 dollar 1099 is now used as “usable income” for that calendar year on your tax returns, and means you now owe on that amount which you’ve received that 1099 for.
Don’t get all freaked out. The government has stepped into place to help homeowners temporarily until 2012. The act that has been put into place as “The Mortgage Forgiveness Debt Relief and Debt Cancellation Act.” According to this act from the IRS you’re covered for up to and not to exceed $2,000,000 as filing as couple or $1,000,000 if filing separately to be 100% protected against having to pay any type of an outstanding balance still owed from your bank/lender in completing your short sale or foreclosure. This act is mainly used for owner occupants properties or if the property a non-owner occupied property you can try to prove your estate is insolvent. For more information, please make sure you read the actual IRS document and see what you qualify for.
Click below to see the actual document from the IRS: