1098 for Short Sale

[lunajazz]

We had a short sale on our home in May 2011. The mortgage had not been paid for over a year at that time. We have received a 1098 "Paid off loan mortgage Interest Statement", with us as the Payers/Borrowers. Do we deduct this interest on our Federal Return? I have plugged in the Cancellation of Debt into our return, so that has been accounted for. Thank you for your help!

[flyingron]

The 1098 indicates deductible interest. The big questions is whether the bank forgave you the rest of the balance (in which case a potentially taxable 1099) may be coming. These days, banks are often retaining recourse in short sale (i.e., you still owe the balance), all they are agreeing to is to release the security.

[Bubba Jimmy]

I hope the cancelled debt is not being included in your gross income. Because it related to your principle residence, it should be excluded on form 982. If you didn't know to do that, you should consult a tax professional. If you did do that then you're probably doing a good job on your return yourself and don't need help. I wanted to cover that base just in case... based on your comment that you hve "plugged in the cancellation of debt into our return". It's more than just plugging it in, it is a matter of getting it excluded from the gross income so you don't pay tax on that money.