Is cash for keys cancellation of debt income?
Nevertheless, the mortgage company than typically issues a 1099 for the cancellation of indebtedness income for the amount of the foreclosure and an additional 1099-MISC for the alleged miscellaneous income and cash for keys. The IRS has taken the position that the cash for keys income as ordinary income and should be taxed. In the case of Bobo vs. Commissioner, the US Tax Court determined that the foreclosure and the additional cash for keys payment were really one transaction. Since in that case, the taxpayer had an actual loss on the sale of their home, even with cash for keys payment there was no additional income.
Any time taxpayer receives a 1099s for a home foreclosure, settlement with a credit card company, or other loan, the matter should always be reviewed with a good tax lawyer to see if they amount of the 1099s is actually taxable or not.