What is Cancellation of Debt (1099-C)?
When a lender forgives debt in a short sale or loan modification, the canceled amount can be treated by the IRS as taxable income, reported to the borrower on a Form 1099-C. Certain exclusions (such as insolvency or specific mortgage-relief provisions) may reduce or eliminate the tax. Because the rules are complex and change, this is a key reason to consult a tax professional before a short sale.
Example: After a short sale forgives $50,000, the homeowner receives a 1099-C; their CPA determines whether an insolvency exclusion applies so they owe little or no tax on it.