A short sale is an agreement between you and your mortgage lender that you are eligible to sell your home for less than you owe, it doesn’t mean you are 100% free from that balance. You could have a tax liability for it. Premier Real Estate NYC is one of the few real estate companies in New York City that helps homeowners understand their rights in a foreclosure.

Prior to the 2007 Mortgage Forgiveness Debt Relief Act and Debt Cancellation, the balance was normally taxed as ordinary income. This seems to have come just in time for the 2008 housing crisis. However, since this act, your debt could be forgiven. Here are the 6 steps to file your debt cancellation during tax time.

Step 1: By February 2nd, you should receive the Form 1099-C – Cancellation of Debt, from your lender.
Step 2: Download the IRS Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness.
Step 3: Complete the beginning of this form, including your name and tax identification number.
Step 4: Check the box on line 1e: Discharge of qualified principal residence indebtedness.
Step 5: Complete line 2: Total amount of discharged indebtedness excluded from gross income. Here, you will use the information from Box 2 on the 1099-C form.
Step 6: Attach your completed Form 982 to your federal tax return.

There are a few caveats of which you may be responsible for some of that difference from your short sale NYC. Don’t believe you have a pass from filing this on your taxes if you do not receive your Form 1099-C. This may have been submitted to the IRS. So, either report it yourself or contact your lender for the copy. This will help you avoid a tax audit or receiving an automatic tax bill from the IRS.