Mortgage Forgiveness and the IRS

Ahh, those pesky 1099 forms we all have to file with our taxes.

Small business owners are always on the lookout for deductions.  I was combing through my files from last year, and came across something I thought you should keep in mind during 2012.

Most of us real estate investors have found ourselves working with short sales, or foreclosures over the last few years.  You and your clients should be aware of a BIG advantage written into the IRS code.

“The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence.”

Until a few years ago, many investors had never seen a form 1099-C.  Lenders are required to report any cancelled debts to the IRS using this form, 1099-C, Cancellation of Debt.

Here is a simplified example –

  • Homeowner pays 100k for a new home.
  • Recession hits, and homeowner sells their home for 80k through a short sale.
  • The following January, the lender sends homeowner 1099-C for 20k.

Before 2007, the homeowner would be required to pay income taxes on $20,000.

Today, if the situation qualifies, (your accountant can help you understand the full guidelines), you can exclude the full amount from your income.

This provision applies to debt forgiven in calendar years 2007 through 2012.

The Mortgage Debt Relief Act expires this year.

If you want to read about more details, you will find full details at the IRS link here.

PDA and smartphone users will find the details at,,id=179414,00.html

There is motivation to get these short sales completed this year.  I realize it is only February, but it’s not too early to be paying attention to these items.

Short sales and the issue of foreclosure can still be a tricky area for real estate entrepreneurs.  We will be spending an entire evening discussing these topics at our Feb. 27th WREIA meeting.

Join us this month at our Washington REIA meeting as we invite attorneys from a local law firm to visit with us and discuss some of the foreclosure defense strategies they are using to assist homeowners in this struggle.You might be very surprised at some of the updates from the “front lines” of the legal community.Short sales and the issue of foreclosure is still a tricky area for investors.  We will be spending an entire evening discussing these hot topics at our Feb. 27th WREIA meeting.And as always, let me know if I can help with your real estate investing here in the DC area.See you on Feb. 27th!

John Peterson

Washington REIA Network, President
Profitable Property, Founder
Find video updates on the Profitable Property Channel at


Register early for the Feb. 27th WREIA meeting online, and skip the registration line!

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