Q: I own a rental property that is worth less than the mortgage balance. What happens if I decide to sell this investment property? It is located in Atlanta and because of market conditions it will almost certainly be a short sale.

Will my lender send me a 1099 statement for the difference between what I owed and the amount the short sale generates? Do lenders usually send the 1099 even if the lender cancels the debt owed? I wondered if there would be a tax consequence because of the sale.

A: Real estate investors whose properties are worth less than the mortgage amount don’t get to take advantage of the special protections and tax benefits that Congress has bestowed upon homeowners who are in trouble with their primary residences.

When an owner sells a property through a short sale, the lender will send a 1099 for the difference between what was owed and the amount accepted on the loan.

The release of indebtedness by that lender – what you should have paid back the lender – is considered a “gift” from the lender to you. The IRS considers that amount to be taxable income. That’s why the amount that is forgiven is taxed.

Some people refer to the release of indebtedness as “phantom” income because evern though you don’t have any more money in your pocket, you owe tax on this phantom cash.

Homeowners who are selling their primary residences and are underwater with their mortgage do not have to pay tax on the forgiven debt thanks to legislation that passed last year.

Real estate investors who sell a property that is underwater, however, would owe federal income taxes on the difference between the sales price and the amount owed on the loan. And, yes, the lender should send you a 1099 for you to use when you file your income tax return.

For more details on your tax liability any possible state tax liability, please discuss the issue with your tax preparer.

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