Short sale’s tax surprise is ‘no mistake’

Uncle Sam says borrowers must pay for mortgage relief

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DEAR BOB: Due to my husband's job location change, we had to sell our house in Michigan where the home-sale market is very slow. His employer offered no relocation benefits, but at least my husband has a job. After listing our home on the market for six months with no purchase offers, we were unable to keep up the mortgage payments and defaulted. The realty agent suggested a "short sale" for less than the mortgage balance. Rather than foreclose, the mortgage lender agreed to accept a purchase offer for about $16,000 less than the mortgage balance. We were happy to get rid of the house and its mortgage. But then we received an IRS 1099 form showing $16,000 taxable income to us. Is this a mistake? --Helga H. DEAR HELGA: Unfortunately for you, it's no mistake. When a mortgage lender agrees to a "short sale" for less than the mortgage balance, the IRS considers the amount received by the lender, which was less than the amount owed, to be taxable "debt relief" income to you as the borrower...