A few weeks ago, I did a blog post titled “You got a Form 1099-C. Now What?” We’re still getting questions on an almost daily basis over there. But it’s gotten a little buried and I want to make sure that information stays accessible. Please post your questions here - I’ll be moving them to this post if any come on the older one too.
Some of the things we’ve discussed: What is the difference between the Form 1099-A and Form 1099-C? The Form 1099-C report cancellation of debt. The Form 1099-A does not report the cancellation. This leads to the question of whether you should report debt forgiveness income from a Form 1099-A. Readers of the blog have reported that the IRS has told them they should and others have been told that they should not (also told by the IRS).
The Form 1099-A is used to report that property was received. Period. It does not say whether the debt was cancelled. If the debt is cancelled, then you get Form 1099-C. If you have property that is both foreclosed on and the debt is cancelled, you’ll get both Form 1099-A and Form 1099-C. If you only get Form 1099-A, that probably means the debt has not been cancelled. Look out. Depending on the state you’re in, the lender may have as long as 4 years to come after you for that debt.
The problem is that many lenders have been merged, bought or otherwise changed and the paperwork is a mess. Plus, the lenders don’t seem to have a good grasp of when to use the right form either.
So what if you don’t get the right form or they’ve used the wrong address to send it to you? One suggestion may be to go ahead and file anyway, assume you’ve gotten the cancellation and then either offset it with a loss in the property (hopefully) or be able to prove why you’re not liable for the tax by filing Form 982.
Got questions? Pleas ask them here.
Tags: Cancellation of debt • foreclosure tax • Form 1099-A • Form 1099-C • short sale tax • tax on debt forgiveness
Related posts:
- Form 1099-A & Form 1099-C Problems
- Form 1099-C & Form 1099-A Debt Forgiveness
- Got a Form 1099-C? Now What?
- How To Report Form 1099-C Income Without Paying Extra Taxes
- Form 1099 Due Out By End of January
On March 12th, 2010 | 4:45 pm
Marie Ackerman said:
I had an investment property in Scottsdale which was short saled in Oct 2009. The bank decided that they wanted to retain the right to come after us for the difference which they have. We did not receive any documentation for year-end accounting from the bank. The question is: should we have received something and if so, what? Also, how do we file taxes if we decide to to a Chapter 13 Bankruptcy for Tax year 2010? Thank you for any replies….
On March 12th, 2010 | 8:22 pm
Diane Kennedy said:
In this case, they are right - the Form 1099-A would have meant that they had foreclosed on the property. A Form 1099-C would have meant that they canceled the debt, which they didn’t do.
If you file bankruptcy, then I would guess they would give you a Form 1099-C. But even if you don’t receive one, include a Form 982 showing that any tax due to discharge of indebtedness would not be due. Bankruptcy is one of the exemptions that stop you from having to pay tax.
It’s an interesting set of circumstances. I’ve heard of a number of people who didn’t get Form 1099-Cs and I suspect that the lenders plan to come after the borrowers later. My guess is that we’re going to see an increasing number of bankruptcies when people get caught up in this.
On March 16th, 2010 | 6:49 pm
Wilma Cullen said:
My husband and I both received a 1099-C form for the same property. One in my name and one in his name showing the same amount on each form. Do we combine those two amounts or just use one of the forms for filing? I am not getting a return call from CitiMortgage on this issue.
On March 17th, 2010 | 10:18 am
Denise Wilgenbusch said:
Regarding Ms. Cullen’s question, we had the same issue with Citimortgage. Per Citimortgage, they are REQUIRED by the IRS to send a 1099-C to each person on the mortgage but use only ONE for taxes. Citimortgage quoted some IRS code. The person at Citimortgage who handles 1099’s is Michelle Parker or Judy Campbell. The number I have for them is 636-261-4461 or 636-261-4486. Hope this helps.
On March 17th, 2010 | 12:12 pm
Diane Kennedy said:
Thank you for the response Denise. I absolutely agree. You only need to report this once.
On March 18th, 2010 | 11:05 am
Dan Orr said:
I had an investment property that I short sold in the 3rd quarter of 2009. The lender agreed in writing that I would have no further obligation after successful close of the short sale. I haven’t received any documentation, 1099 A/C or otherwise, from them; only reported the property as sold on my return with the corresponding loss from the sold price. Should I be anticipating something, file something extra for the IRS or go ahead and file?
On March 18th, 2010 | 8:50 pm
Diane Kennedy said:
Dan, they should issue you a Form 1099-C. Call the lender and find out when/if it has been issued.
My concern is that you don’t file correctly and hear about it 2 years later. And now there are penalties and interest that have stacked up PLUS you need to come up with the tax, and might not have the cash laying around.
On March 28th, 2010 | 9:10 am
Paula Dahlke said:
My husband and I received a 1099-A, then a 1099-C for 2009. Are we just to file the 1099-C? There is no chapter 7 or 11 with this home, and it was our primary(only)residence. I am also confused when Turbo Tax says we are to claim it under Home Sales. How? This is the first year we have done our own taxes and I am begining to think Turbo Tax was a BAD idea for us to try. Please help!!
On March 28th, 2010 | 11:53 am
Diane Kennedy said:
Paula, the Form 1099-C means that you have Cancellation of Debt. You need to report that amount as income unless you qualify for an exemption. Chances are you will get an exemption for federal tax, but your state may not give you one. (Not all states adopted the same exclusion) You will need to file Form 982 with your return to get this exemption.
I’m not sure that Turbo Tax can help you with your return this year. You don’t want to get this wrong - otherwise, you’ll have to pay tax on that COD income. I suggest you go back to your old preparer one more time or find someone else to do it this year. But make sure they know what a Form 982 is and how to file it for you.
On April 5th, 2010 | 9:44 am
Joe said:
I apologize if this sounds redundant, but I received a 1099-A but no 1099-C for tax year 2009. It was for an investment property that was foreclosed. I understand that the bank may still come after me for deficiency, but how should I file the 1099-A for now? Some tax pros I talked to said I should call the bank and ask them if they intend to cancel the debt. If not, I can write off the loss as a Capital Gains Loss on a Schedule D since the foreclosure can be treated as a “disposal of property”. Any thoughts would be helpful.
On April 6th, 2010 | 10:10 pm
Brian said:
Received a 1099-A for an investment property that was foreclosed on in Jan 2009. Based on the Fair Market Value listed on the 1099-A, I would have just over a $180,000 loss. I will use this loss against any depreciation recapture, but cannot use it against debt forgiveness because I did not receive a 1099-C. Also filed Chapter 7 bankruptcy on December 16, 2009. The amount still owing to the bank will be discharged in my bankruptcy. Because of the bankruptcy discharge, the bank cannot send me a 1099-C form in the future or if they do, I can show the gov’t that this debt was discharged in Chapter 7 bankruptcy and is not eligible for debt forgiveness. Would you agree?
On April 7th, 2010 | 10:22 am
Diane Kennedy said:
Joe, the Form 1099-A does not show cancellation of debt. But it does give you enough information to file the loss on Schedule D. BTW, if the property was in service then it is a business property. That means it is NOT a capital loss and thus subject to the $3K/year limitation.
If the company later issues you a Form 1099-C, you will have COD income to deal with. If you are insolvent or file bankruptcy, you won’t have tax due on that.
On April 7th, 2010 | 10:27 am
Diane Kennedy said:
Brian, you have an interesting question here. If you use the bankruptcy exemption to avoid the tax on COD income (assuming they give you a Form 1099-C), then you need to adjust the basis on the property.
Let me step through this: Let’s say you buy a property with zero down for $300,000. It’s now worth $200,000. You get a discharge for $100,000 and you also have a loss for $100K. If you didn’t get the exemption, they would wash. But because the bankruptcy exempts the tax on the discharge, you have no tax due. This exempted amount reduces your basis in the property, so you don’t get a loss either.
In effect, this stops you from getting to take a loss and then later not having to pay tax on the COD income.
So…for now, I think I would report the sale on Schedule D, with the loss. Then once you know the status on the debt forgiveness, you may have to amend your 2009 return.
On April 15th, 2010 | 8:14 pm
John said:
I have two 1099-A forms for rental properties. The FMV and Outstanding Balance are the same amount. Does this mean that if/when I receive my 1099-C it will most likely be a COD of zero? And if I were to file the 1099-A form what would I do with it?
On April 16th, 2010 | 11:40 am
Brandon said:
We’ve received 1099-A for our rental property(residential) and we will soon foreclose our primary home this month as well.
We’ve moved out already back in February from the property. I heard that we don’t have to worry about the cancellation of the debt for the primary residence. But we are concerning about our investment property($180,000 deficiency)
Could we be able to file a bankruptcy AFTER we get 1099-C form or We have to file BK BEFORE we the form? Does it matter? Please help…
Thank you,
On April 16th, 2010 | 12:18 pm
Diane Kennedy said:
You probably do not have to pay federal tax on the debt cancellation for your primary residence. But you will need to file Form 982 with your tax return to claim that exemption. Additionally, you need to check to make sure your home state has the same provision.
For the investment property, you probably will have a loss to claim on Schedule D as well.
As far as when to claim bankruptcy, check with your bankruptcy attorney.
On April 22nd, 2010 | 3:52 pm
Susan said:
What if the Bank writes the debt off as a loss on thier books. How would one know? If the banks take the deduction on thier taxes how can the send a 1099 to the default borrower?
On April 22nd, 2010 | 4:18 pm
Diane Kennedy said:
Susan, in other words - who is watching the banks? Sadly, I’m not sure anyone is.
I’ve heard story after story of people trying to contact Bank of America regarding their Countrywide Mtge and B of A not having a clue.
On April 22nd, 2010 | 4:40 pm
Susan said:
My initial question was: What if the Bank writes the debt off as a loss on thier books. How would one know? If the banks take the deduction on thier taxes how can the send a 1099 to the default borrower?
Let me claify. If the bank (A local ma and pa bank) use the borrowers unpaid interest bank charges misc other default charges as a deduction to reduce thier tax liabilty, prior to accepting the short sale sholud I get the bank to produce a document that they will use the loss for thier benifit?
On April 23rd, 2010 | 9:38 am
Diane Kennedy said:
Susan, I’m still confused. Is it your concern that the bank doesn’t properly report their own financial statement and tax obligation? Or are you concerned that you won’t get debt forgiveness?
Maybe if you could provide some specifics for your particular circumstances that would help me answer your question.
On April 23rd, 2010 | 10:11 am
Susan said:
I am a Real Estate Broker in Illinois. I have a client who submitted a short sale contract to his mortgage holder (It’s an investment property). He is short $300,000. I understand the bank must issue a 1099C. What if does a Deed in Lieu (DIL) of foreclosure. (The bank did not start the foreclosure.) In the DIL agreement can the bank agree to not issue a 1099C?
On May 15th, 2010 | 10:40 am
Sam said:
Hello Diane,
We have land in North Carolina, where the value had decreased by 90%. We are planning on letting this investment go into Foreclosure due to my financial hardship.
Question for you, is North Carolina a state that will issue some flavor of 1099 ?
If they decide to issue a 1099, what are my options for minimizing or completely avoiding the tax due ?
On May 15th, 2010 | 2:01 pm
Diane Kennedy said:
Sam, 90% decrease is a huge hit! Yikes.
If you do a foreclosure or DIL, you should receive a Form 1099-A. That means they have taken back property for a debt.
It looks like NC IS a state that can get a deficiency judgment. That means that the lender may not forgive the debt and will instead pursue you for the loss. You can stop that process if they lender agrees to give you an estoppel, which they may be more likely to do if you voluntarly do a DIL.
Here is a reference I found for North Carolina law: http://www.foreclosure.com/statelaw_NC.html#6
Check out the statute and consult an attorney, though, to make sure the information is accurate and up to date
The Form 1099-C means cancellation of debt. If they cancel the debt, you have taxable income. If they don’t cancel the debt, they probably intend to sue you. There isn’t a good answer here really…
On May 15th, 2010 | 11:13 pm
Sam said:
Hi Diane,
Thanks for your prompt response.
What are my options for minimizing or completely avoiding taxable income on a 1099-C ?
I am sure many people are in a similar situation.
On May 16th, 2010 | 4:27 pm
Diane Kennedy said:
Sam, in the case of an investment property you probably will have a loss on the sale (ie, disposal). On thing to be careful of though, if you’ve never turned it into a rental, it’ll be a capital loss which can only offset capital gains or $3K/year against active income.
We’re going over that in great depth on the next coaching call for USTaxAid. http://www.USTaxAid.com/coaching
On June 14th, 2010 | 10:05 am
Patrick said:
I received a tax form 1099c cancellation of debt from a Bank in December 2009. We now have received a complaint and a statement of damages from the Bank attorney they are now looking to collect on the same cancelled debt. AS per the IRS a 1099c is to be only issued when the issuer is indeed cancelling a debt. I contacted the Bank to discuss this form and was referred to their legal counsel I contact the banks counsel May 19, 2010 and have not heard bank to the status of their complaint and the reason for the 1099c form that they issued. Were do i go from here. Thanks
On June 15th, 2010 | 9:06 pm
Leah said:
Hey Diane-
Seroiusly wanting to not love my accountant anymore. personally did chap 7 in 2009- included units of rental property as I signed personally as well- That was all discharged- fine- Could not meet the obligations to the bank for the rentals- no tenants etc etc- made a deal w/ the bank to take them back and give them 30K in rental monies. Agreement also stated they released my company - also said if they ever did dispose of them they MAY send me a 1099C - but I would have to see the books of all the income etc etc( they are continuing to run them as rentals and assuming they will not be selling them anytime soon.) So my accountant comes back with me like owing alot of $$ in taxes- she took that ( none existant no 1099 nothing+ went BK and discharged) sale as an equal to what I owed on the property and added that to my income. Owning that property even with my other part of my company making some money- the debt I had againist the FMV- I would never see the = signs again on.
SO my question is- does she have no clue what she is doing?? She is not correctly interpreting the ” insolvency ” tax code- which in my world says you owe a ton more than what they are worth-please correct me if I am wrong on that- this was discharged in the BK- but because it is rental property does it not count? and lastly- there is no 1099 of any kind and I doubt there ever will be.. so why would u tax me at the full boat of what was owed on them>> Please correct me if I am wrong on any of these issues- because I do not have a billion more dollars to pay them and from what I am gathering - I don’t owe it- PS it is a LLC Thanks so much !!! also- isn’t there also something about recourse or non resource notes?? The rental properties were originally done up as recourse mort/notes. The bank agreement set any liability aside - so what would be the correct avenue?? the original recourse??
On June 17th, 2010 | 4:25 pm
Diane Kennedy said:
Patrick, the Form 1099-C is indeed supposed to be issued only when there is cancellation of debt.
The bank goofed or there is some other charge they didn’t forgive. You may want to see an attorney, but by all means document everything you are doing. Send correspondence via return receipt or overnight so they have to sign for it.
On June 17th, 2010 | 4:30 pm
Diane Kennedy said:
Leah, there is something seriously wrong here.
First of all, even if you didn’t have the BK, most likely the loss on disposal of the properties would have equaled any debt forgiveness.
But, to be honest, I’m not even sure there was debt forgiveness. They took back the property in an agreement. Most likely that means they accepted the properties for the amount of the debt plus $30K (which is how much you kept for rent income, if I’m reading this right.)
So far, two reasons you wouldn’t have tax here - (1) it would offset if there was debt forgiveness and (2) sounds like according to the agreement there wasn’t even any debt forgiveness anyway.
Then finally, even if there was debt forgiveness, a BK will wipe out the tax due on that. You can’t take a loss on top of it, but it will wipe out any loss. Did your accountant file a Form 982 and follow the instructions? That’s where this is all discussed.
Drop my husband a note at Richard@USTaxAid.com and he can set up for a free review of your return. I’ll take a look at it and see if there is an easy fix.
On June 17th, 2010 | 4:32 pm
Diane Kennedy said:
Leah, correction - I can’t go back and correct my comment. In the next to last paragraph, I meant to say that you can’t take a loss on top of the forgiveness, but the Form 982 will wipe out any debt forgiveness tax issues.
Yes, it’s complicated, but this is the type of things we do for our clients.
On June 25th, 2010 | 4:13 am
Stephen Silvers said:
Hello Diane,
I owned a property jointly in Florida with my cousin. We both were on the mortgage and deed. We did a short sale. The bank sent me a 1099-c only in my name and ss#. What should I do??
On June 29th, 2010 | 2:46 pm
Diane Kennedy said:
Stephen, I’m assuming that this is an investment property.
You’ve got a couple of options. If there is an offsetting loss from the property, take the entire loss yourself on Form 4797 (reporting gain/sale from disposition of property).
Otherwise, you need to have the mortgage company revise the Form 1099-C, which I suspect you’ll have a hard time getting them to do. You could report only half and your cousin reports half, but I’d almost guarantee you’d get, at a minimum, a letter from the IRS about it.
On June 29th, 2010 | 3:03 pm
Steve Silvers said:
Diane,
We did not use the property for investment.This was more of a vacation home for each of us. I stayed there for 3-4 months and so did he.
Thank you
On July 20th, 2010 | 2:40 pm
Eddie said:
Diane,
First of all I have to tell you that your blog is by far the most helpful one that I have found.
My Question:
I am short-selling my rented investment property in Florida.
I purchased it for $216,000, the short-sale price is $74,000, and the amount of my 1099-C will be $98,000 ($172,000 owed less $74,000 from the short sale).
My question is how to avoid or minimize the tax implication of the 1099-C. From some of your prvious blogs I am assuming that since the proprty is and has been in service (rented) I can off-set the loss on disposal with the 1099-C. Is that correct? Is there an IRS publication that further explains this to me?
Thanks for you help… Eddie
On July 20th, 2010 | 4:28 pm
Leah said:
Hello question again for you- I have a SBA loan that they are supposedly taking a OIC on - 1. will they 1099 a/c me the difference? They have the building & equip(fyi) 2. will they still ruin your credit w. the reporting-
I know part maybe out of your realm but I can’t seem to find any info about these
On July 20th, 2010 | 5:33 pm
Diane Kennedy said:
Eddie: Thanks for your kind notes!
The Form 1099-C income gets reported on your Form 1040 as miscellaneous income. For info on that, take a look at the instructions for Form 1099-C.
The sale of the property is reported on Form 4797. So, if you purchased it for $216,000, and assuming you didn’t do a like kind exchange into it, we’ll say your basis is $216,000 plus improvements that you capitalized, less accumulated depreciation.
Just for the sake of the example, let’s say the basis is now $214,000. You are selling the property for $74,000. You have a loss reported on Form 4797 of $140,000. If you have any suspended losses from the property, you will now take those deductions too.
So in this case you have income of $98,000, but you also have a loss of $140,000. So, you end up not having any taxable gain.
Take a look at the instructions for Form 4797 to see how you report sales.
On July 20th, 2010 | 5:34 pm
Diane Kennedy said:
Leah, I don’t know how SBA is working on these deals but I do have clients who have been successful at negotiating with their bank to have the credit hit removed from their credit report. If the SBA is forgiving debt, there is no negotiation there, you’ve got COD income.
I’m guessing you have a business loss that will help offset this?
On July 22nd, 2010 | 12:36 am
Why Can’t I Find an LLC Tax Form? | USTaxAid Services said:
[...] Reporting Form 1099-A & Form 1099-C [...]
On July 31st, 2010 | 8:58 am
Eddie said:
Diane,
Thank you for your response on 7/20/2010.
Basically based on your response I will be able to deduct the loss as ‘ordinary’ (not a capital loss). Does that answer depend in any way as to whether or not I am a ‘real estate professional’ as defined by the IRS?
Thanks
Eddie
On August 7th, 2010 | 8:03 am
Roman said:
Diane,
My question is regarding a 1099-C for a rental property. A short sale was done on a rental property for $50,000. The loan amount outstanding was for $110,000. First of all is my 1099-C going to say $110,000 or $60,000? Do I also get a 1099-S (for the sale of $50,000)?
I believe I have to reduce my current basis which is $120,000 by the 1099-C amount (assuming that will be $110,000)giving me the adjusted basis of $10,000. So my final questions is (if I am correct thus far), do I now have to calculate a gain on ’sale’ by taking the $50,000 sale less my new adjusted basis of $10,000 (giving me a net ordinary gain of $40,000)?
Thanks
On August 9th, 2010 | 10:40 am
Diane Kennedy said:
Hi Roman,
We’ve got a new blog series on real estate starting on 8/10, would you mind posting your question there? I’m afraid it’s going to get buried in this older blog.
Thanks! Diane
On August 11th, 2010 | 9:23 am
Michelle said:
Hi, Diane -
While in Ch.7 in late 2008, our lender took our two investment properties out of the bankruptcy and then took them back as Deed-in-Lieu’s. We then received 1099-A’s for 2009. The amounts in the “Balance of principal outstanding” & “Fair Market value of the property” had the same amounts, resp., on both 1099s (although the FMV not nec. actually true, we did put large down payments on the properties). We did not receive a 1099-C. Did the way they reported on the 1099-A infer that they won’t send 1099-C’s? I don’t see how they could, but if they did eventually send 1099-C’s, would I still be able to deduct any debt cancellation with the bankruptcy exclusion (or the insolvency one)? And thus amend my 2009 return?
Thanks!
On August 12th, 2010 | 12:41 am
Form 1099-A & Form 1099-C Problems | USTaxAid Services said:
[...] Reporting Form 1099-A & Form 1099-C [...]
On August 13th, 2010 | 6:24 am
Raj said:
I had a short sale on my principal residence in 2009.I havnt filed my 2009 tax return yet. I received 1099-S and a 1099-C. Do I need to report both of these forms on my tax return or only the 1099-C. Thanks.
On August 19th, 2010 | 5:00 am
Patrick said:
I would not file the 1099c until I got a letter of confirmation from the bank that the 1099-c issued was sent out and not in error and it is indeed the banks intent to cancel the debt. That the bank will not pursue this debt in court etc.
On August 26th, 2010 | 11:17 am
Peggy said:
My question is, after the home forecloses and there is a deficiecy (i.e. 2nd mortgage not used for home improvements), and assuming the bank sends a 1099c, would we be able to file chapter 7 to remove the tax debt?
I understand that if we filed BK prior to foreclosure it is taxation is relieved, but what happens if we wait to see if the bank even bothers to pursue us, can we, at that time file BK?
On August 29th, 2010 | 9:56 am
Diane Kennedy said:
Peggy, this is something that you need to discuss with a bankruptcy attorney. Don’t assume anything regarding BK laws, they can be tricky when it comes to tax liens.