Tax Court rules “cash for keys” payment is not ordinary income.
Cash for keys payments have become fairly common in cases of struggling homeowners facing foreclosure. To avoid a lengthy and expensive foreclosure process, many lenders offer a cash incentive to homeowners to vacate the property quickly and to leave it in good condition. Often these lenders issue a 1099-Misc to the homeowner showing that the payment is nonemployee compensation which would be taxed to the individuals as ordinary income subject to self employment tax. In TC Summary Opinion 2016-74 the tax court again confirms that this treatment is not correct. In the above case, the CPA for the taxpayers included the payment as part of the sales proceeds of the property and not as ordinary income. The IRS disagreed and assessed additional taxes against them so they went to court. The tax court agreed with the position taken by the CPA and not the IRS. Cancellation of debt income is a complex tax issue. It pays to have competent tax advice from someone such as an Enrolled Agent or CPA if you are facing this issue.