I sold some real estate in 2023 and I owed more than the proceeds, couldn't even pay all the principal let alone the interest. It was a private written mortgage and note with a relative. The documents contained a provision that I am not liable for anything more than the property value, so I am not required to pay the rest. The lender's payoff letter acknowledged this and stated he would accept the entire proceeds at closing to release the mortgage and he did not issue me a 1099-C or any kind of tax form. I think he might write it off as a bad debt on his taxes.
Should I be concerned that the unpaid shortfall might be regarded as "income" to me like some cancelled debts are? This does not seem like forgiven or cancelled debt to me since it was in the agreement from the beginning that I would not be on the hook for any shortfall. If this is considered income to me, would it be only to the shortfall of principal, or would it include the shortfall of interest as well?
Thanks
