There is an IRS form 982 that you can have him get off the IRS website, or through his tax preparer to show those losses to offset that income that he could potentially be 1099'd for later. There is an area on the form that specifically asks for the down payment made/lost, closing costs paid/lost for the initial sale, upgrades and repairs made, etc. The only thing is, he has to be able to show receipts from the title company and/or a certified HUD from that first closing in order to claim it as a write off, of course. If his tax preparer is not familiar with that form, then he probably needs to find a more experienced tax preparer for at least this one filing year.

Perhaps. The best answer to this would be for to consult a CPA to determine how insolvent the homeowner was at the time of the foreclosure or sheriff sale. The IRS Form 932 is specific to addressing any claimed income owed in result on deficiencies. The lenders will choose to either write off the loan and 1099 the homeowner or they will file for the deficiency judgment. They cannot do both. They are governed by state laws on how they can collect from a homeowner in default.