Here is a post from a colleague of mine, Attorney Hilton Wiener, concerning the pitfalls of incorrectly reporting the results of a short sale on your tax return:
The following is an excerpt of an e-mail I received from a client. His CPA made two common mistakes leading to the imposition of a significant tax burden:
“The lender foreclosed on a piece of property at [a development which is the subject of a great deal of litigation and shall remain nameless] back in 2009. I hired your firm to assist me in order that I would avoid a deficiency judgement. B of A foreclosed and waived the deficiency judgement. I received a 1099 A. I never received a 1099 C. My CPA counted the 1099 A as forgiven debt, and included it as income on my 2009 tax returns. Furthermore he wrote off the total loss on my schedule E rental loss and not as capital loss, thereby counting the full loss in one tax year.
The IRS audited me and claimed that the loss should have been listed as a capital loss subject to $3,000 per year max. We met with the IRS and in the course of discussions with them, we stated that perhaps we may have jumped the gun. Perhaps we should not have even mentioned the forgiven debt due to the fact that we did not receive a 1099 C. The IRS rendered a ruling stating that the 1009 A should count as forgiven debt, and that the loss should be limited to $3,000 per year. I signed a form and the amended return resulted in a substantial tax consequence.”
A couple of common mistakes made by the CPA: First, only a 1099 C need be dealt with. Including income based upon receipt of a 1099 A is like voluntarily offering taxable income to the IRS. Second, it is a common misconception that the loss on the property will offset the 1099 income. Wrong! One is ordinary income while the other is a capital loss limited to $3000 per year. Third, this taxpayer could have avoided the problem entirely. I know the facts. His debt was not simply “forgiven,” but it was part of the settlement of the dispute. The issuance of the 1099 in this case was improper. In similar cases, we have written a tax opinion letter so stating.
Copyright © 2013 Law Offices of Hilton Wiener, All rights reserved.
Law Offices of Hilton Wiener
100 Park Avenue, 20th Floor
New York, NY 10017
Read more of his foreclosure blog here: http://www.returnthedeed.com/blog-2/