What to Do With Form 1099-A
You must report the 1099-A information but you might not take a tax hit
A homeowner typically receives IRS Form 1099-A from his lender after his home has been foreclosed upon. The information on the form is necessary to report the foreclosure on your tax return...and yes, unfortunately, you must do so.
You might receive multiple Forms 1099-A for a single property if you had more than one mortgage or lien against it and more than one lender was involved in the foreclosure. But don't panic. Here's what you need to know.
Foreclosures and Capital Gains
The Internal Revenue Service treats a foreclosure just the same as if you had sold your property. You'll have to calculate your capital gain or loss, but unlike with a normal sale, there's no "selling price" in this scenario. This is where Form 1099-A comes into play.
The Information on Form 1099-A
You'll need the selling date and the selling price of the foreclosed property to properly report its "sale" to the IRS, and you'll find this information on Form 1099-A. For the sales price, you'll use either the fair market value of the property or the outstanding loan balance at the time of the foreclosure.
The outstanding loan balance is found in box 2 and the property's fair market value is found in box 4 of the 1099-A. The date of the foreclosure is indicated in box 1 and this will be used as the date the property was disposed of—that is, the "sale date
Taxpayers must also know if the loan was a recourse loan or a non-recourse loan. The loan was probably a recourse loan if the lender has checked "yes" in box 5 which asks "Was borrower personally liable for repayment of the debt?"
Do You Have a Gain or a Loss?
Capital gains are reported on Schedule D for homes that were personal residences. The IRS does not allow taxpayers to claim losses on personal residences. Any gain—and yes, a foreclosure can actually result in a gain—can usually be offset by the capital gains exclusion for a main home so it’s unlikely that a foreclosure will result in any capital gains tax coming due.
You must report the 1099-A information anyway, but you probably won't have to take a tax hit.
Reporting the Foreclosure
Use the date of the foreclosure in box 1 of the 1099-A as your date of sale, then enter the selling price on Schedule D. This will be either the amount in box 2 or the amount in box 4. Which box you'll use will depend on the lending laws of the state in which the property was located so check with a local tax professional to make sure you select the correct one.
Calculating Your Gain
You can calculate your gain by comparing the “sales price” you used to your purchase price, which is your cost basis in the property. This information can typically be found on the HUD-1 closing statement you received when you purchased the property. The difference between the selling price and your cost basis is your gain. Enter this on Schedule D and on line 13 of your Form 1040 tax return.
Use Form 4797 if the foreclosed property was a rental or an investment. You'll probably need the assistance of a tax professional in this case because there are additional factors to take into consideration, such as recapture of depreciation deductions, passive activity loss carryovers, and reporting any final rental income and expenses.
Form 1099-A vs. Form 1099-C
You might receive Form 1099-C instead of Form 1099-A if your lender both foreclosed on the property and canceled any remaining mortgage balance you owed. In this case, the IRS takes the position that you received income from the foreclosure—you received money from the lender to purchase your home and you did not pay all that money back.
But although forgiven debt reported on Schedule 1099-C is usually taxable income, the Mortgage Forgiveness Debt Relief Act generally excludes mortgages canceled through foreclosure.
An Important Update
This tax provision allowing you to exclude mortgages canceled through foreclosure technically expired on December 31, 2016, but the Bipartisan Budget Act breathed new life into it in February 2018. It was reinstated retroactively to cover tax year 2017. Only time will tell if Congress renews it again for 2018 and future years.
For now, this provision covers foreclosure agreements entered into in 2017. You should qualify if the total of your debts exceeded the total value of your assets immediately before the time of foreclosure. This means that you're "insolvent" and you must only report canceled debt on your tax return to the extent that it exceeds your insolvency—the difference between your debts and your assets.
For example, you might have debts totaling $300,000 and all your remaining assets are valued at $200,000. That's a difference of $100,000. If your lender forgave or canceled a $120,000 balance on your mortgage loan, you only have to report $20,000 as income—the amount exceeding your $100,000 insolvency.
NOTE: Tax laws change periodically so you should consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and it is not a substitute for tax advice.