Short Sale Tax Risks

When the lender decides to forgive all or a portion of a borrower’s obligation through a short sale, the forgiven amount may be considered income for the borrower. In other words, the Income Tax Code holds that forgiven debt is income to short sellers, which may require your lender(s) to give you an IRS form 1099, which is “debt forgiveness income.” There are defenses to debt forgiveness income and sellers should be certain to consult an attorney or certified public accountant before electing a short sale.