IRS publication 4681

March 10, 2010

When a lender cancels debt, in several cases they will issue a 1099-c.  The “c” stands for ‘cancellation of debt’.  This is important to understand if you are considering a short sale.  In some cases, you would be liable for the income, however there are important exceptions you need to know about.

The 3 most common exemptions are:

1)  primary residence.  If the property is/was your primary residence, you are probably exempt from being liable for income taxes on the ‘loss’ the bank took.

2) insolvency.  If you were insolvent immediately prior to the loss, you are exempt.

3) bankruptcy.  If you discharge your debts in a chapter 7 bankruptcy, you will not be liable for the income tax.

You can get complete information in IRS publication 4681, which you can download here:  http://www.irs.gov/pub/irs-pdf/p4681.pdf

They even have an insolvency worksheet so you can find out if you qualify.

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