If I don’t have to pay income tax on my forgiven mortgage debt, why did I get a 1099 form?

If I don’t have to pay income tax on my forgiven San Diego home mortgage debt, why did I get a “Debt forgiveness” 1099 form?

We are not tax professionals and cannot give tax advice, but we can tell you the short answer: Because the IRS requires it.

Most San Diego homeowners know that under the terms of the Mortgage Forgiveness Debt Relief Act of 2007, homeowners are not required to pay income tax on forgiven debt if that debt was incurred for the purchase or improvement of a qualified principal residence. This Act  was extended through December 31, 2016, and hopefully it will be extended again.

So it’s natural for those who have gone through foreclosure or had debt forgiven through a short sale to wonder why they received a debt forgiveness 1099 form, and why, on page 11 of IRS publication 4681, it states: “The lender must file form 1099-C and send you a copy if the amount of debt canceled is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money.”

The publication doesn’t actually state why, but we can assume the reason to be verification of “bad debt” deductions on the part of the lender. Remember that your lender is allowed to reduce its taxable income by the amount of debt forgiven.

Publication 4681 gives examples and shows how to report the debt forgiveness 1099 on your taxes, then how to use form 982 to show that you aren’t liable for tax on the forgiven amount.

Do note that The Mortgage Forgiveness Debt Relief Act of 2007 only removes tax liability from indebtedness directly related to the purchase or improvement of your home. You will still be liable for debt on a second mortgage or home equity line of credit used to pay off other debt, purchase a car, take a trip, etc.

However, you may still be exempt from income tax on forgiveness of that debt. If you have forgiven debt related to a second mortgage or a home equity line of credit, and if you were “insolvent” at the time the debt was forgiven, you won’t be required to include it in your income. Pages 4 and 5 of publication 4681 explain how to determine insolvency and page 6 offers a worksheet.

Do consult with a tax adviser before assuming that you owe or don’t owe.

If you have questions about how the laws affect you, call 619-929-1413 or write td@tomdunlap.com. We’ll be glad to assess your situation and put you in touch with tax advisers who can help protect your financial future.

This information is not to be taken as tax advice. We are not tax professionals are we are not familiar with the intricacies of tax law.

Please read IRS Publication 4681 and consult your CPA or tax preparation professional for advice.


Please note that the information provided on this San Diego short sale page is generic, academic information used for general information purposes and may not be construed as or relied upon as a promise for a specific outcome.

This site provides information about real estate, law, income taxes and credit scores as relates to borrowers in distress, short sales and similar situations. The site is designed to help users safely cope with their own needs. Information is not the same as advice — the application of law or regulations to an individual’s specific circumstances. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a lawyer, tax adviser or other specialist if you want professional assurance that our information, and your interpretation of it, is appropriate to your particular situation. The models in photographs accompanying the testimonials on this website are used for illustrative purposes and are not a personal endorsement.