Got a 1099-C After a Short Sale or Foreclosure? Here's What It Actually Means.

If your lender forgave debt as part of a short sale, deed-in-lieu, or foreclosure, you may receive an IRS Form 1099-C the following January. The number in box 2 is the canceled-debt amount and the IRS treats it as income unless you claim an exclusion.

The most useful exclusions

• Insolvency (§ 108(a)(1)(B)): If your liabilities exceeded your assets immediately before the cancellation, you can exclude up to the amount of insolvency. This is the most common exclusion I see used.
• Bankruptcy (§ 108(a)(1)(A)): Debt canceled in a Title 11 bankruptcy case is excluded.
• Qualified Principal Residence Indebtedness (§ 108(a)(1)(E)): If still extended for the relevant tax year, this excludes forgiven mortgage debt up to certain limits — check current law before relying.

How you claim it

File IRS Form 982 with your return. The form looks intimidating but is short — it's a series of yes/no boxes plus a few amounts. The math (especially insolvency calculations) is where homeowners stumble. A CPA who has done a few of these is worth far more than they cost.

This is general information, not tax advice. Talk to a CPA for your specific return.