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The short sale transaction itself - reportable on 1099-A - http://www.irs.gov/pub/irs-pdf/f1099a.pdf should be treated as disposition of the property at the sale price.
The capital gain/loss is calculated as (selling price) - (basis - that is mainly purchase price with some adjustments)
The loss on personal property is not deductible. The gain is taxable, but if the property was used as a primary residence at least two out of five years - you may exclude the gain from taxable income (up to $250,000 for singles)
If you negotiate with the creditor and all or part of the debt is forgiven or the debt would be canceled under bankruptcy protection procedure - you are sent the form 1099-C.
The amount of debt forgiven is reportable on 1099-C - http://www.irs.gov/pub/irs-pdf/f1099c.pdf - generally is taxable, unless an insolvency exemption apply -- you should file a form 982 - to proof your insolvency - and might exclude all or part of canceled debt from taxable income.
The Mortgage Forgiveness Debt Relief Act of 2007 allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence. You still need to file the form 982 to claim the exclusion.
More information, including detailed examples can be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.
Let me know if you need any help.
If your was a co-signer of the loan - and the actual owner of the property was your brother - he is the one who is selling the property and may have a capital gain and may be eligible to exclude the gain from taxable income.
The form 1099-C is issued to the person. who is listed on the loan. If several persons are listed - the form is usually issued to the person who is listed the first. If your brother is listed the first - the form most likely will be issued in his name - but that should be confirmed with the mortgage company.
If the debt is canceled - the creditor is required to issue the form 1099-C - that is not something they could decide to issue or not.
If you is a co-borrower - that means th e loan was issued to you as well as for your brother - so if the loan is forgiven - it is forgiven to you and to your brother.
If you are not a co-borrower - but you co-sign the loan as guarantor - you are not a borrower and there would not be nothing to forgive.
If you are a borrower and the loan is canceled and your name is XXXXX XXXXX on the loan note - the form 1099-C most likely will be issued to you - and yes - that generally would be your taxable income.
Because that is not your primary residence - provisionings of the Mortgage Forgiveness Debt Relief Act of 2007 would not be used.
However - you still could use an insolvency exemption - see above.
I suggest to contact the bank - and make sure that the form 1099-C would be issued to your brother - and not to you.