Federal income tax and VA Compromise settlements
I completed the sale of my home using the VA Compromise Program. This program pays off the difference in the event of a short sale. The mortgage company submitted a 1099C to the IRS for the difference.
It is my understanding that the loan has been paid in full, so as far as the bank is concerned the loan has been settled. A new relationship has been formed between the VA and myself. Under this relationship until I pay back the difference I can no longer use my VA benefits.
My question is should the bank have submitted the 1099C and what can I do to remedy the situation? The bank has been nonreponsive to my requests.
2 Answers from Attorneys
Re: VA Compromise settlements
First, the bank was obligated by the Tax Code to submit the 1099-C.
It is long-established law that any forgiveness of debt is considered to be income and you will pay income tax on it. The difference between the original balance of your mortgage and the amount paid by the VA under the short sale is therefore income to you. If you repay the VA, you may be able to go back and amend your income tax return for the year in which you received the 1099-C, so long as that year remains open.
Re: Federal income tax and VA
Attach a written explanation with your tax return, detailing your reason for excluding the discharge of indebtedness in your gross income. First, it is the right way to proceed, and second, your chances of audit are very low under these circumstances.
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