Form 1099-A, Form 1099-C and Other Tricky Tax Reporting on Dumping Bad Real Estate


10-08-2010-1

The most popular blog entries I’ve written lately relate to the confusing world of real estate tax reporting.

We’re into the 3rd year or so of depressed real estate prices and as unemployment continues, some people simply can’t hang on to their upside homes and/or vacant real estate investments.

It’s a hard decision to walk away and often it’s not that easy to actually get done. The surprise a lot of people discovered over the past few tax seasons, though, was that it could almost mean you owe some taxes you didn’t expect to! That tax due comes from Cancellation of Debt (COD income).

The way it’s supposed to work is that if a property is picked up in foreclosure or there is a deed-in-lieu of foreclosure, the lender will give you a Form 1099-A. This will show you the approximate value of the property and the debt on the property.

If the debt isn’t forgiven, then they intend to come after you for the difference between what the value is and the debt.

So, let’s say an investment property is worth (according to your best guess and/or the Form 1099-A value) $65,000. Your debt is $150,000 and your basis is $165,000. You’ll have a loss of $100,000 on the property that is reported.

At some point, the lender might forgive the debt. You’d then have taxable income of $150,000 less $65,000 or $85,000.

But then what happens if the bank doesn’t give you a Form 1099-A? Or if they do, it doesn’t have a fair market value listed?

That’s where it gets tricky and where I wish we’d see the IRS start enforcing the rules on the lenders. It’s left a lot of taxpayers in a bad spot not knowing how to report a transaction.

The next shoe to fall will be the foreclosure mill crackdown. With allegations of foreclosure fraud and deals that need to be unwound from GMAC, Chase, Bank of America and others, how do you also unwind your tax returns? I see a big mess heading our way.


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12 Comments so far:


On October 13th, 2010 | 11:46 am
J dancer said:

Please clarify if the debt cancellation income on a sort sale of a SFR rental property is an exception for “Qualified Business Real Property” as indicated on Part I of Form 982 line 1d; and in such case please clarify the difference between lines 4 and 5 for reduction in basis of Part II of 982 (does it matter which to use)? thanks


On November 24th, 2010 | 12:29 am
2011 Means Major Changes in 1099 Reporting. Are You Affected? | USTaxAid Services said:

[...] Form 1099-A, Form 1099-C and Other Tricky Tax Reporting on Dumping Bad Real Estate [...]


On November 27th, 2010 | 12:25 am
3 Steps to Avoid Form 1099 Penalties | USTaxAid Services said:

[...] Form 1099-A, Form 1099-C and Other Tricky Tax Reporting on Dumping Bad Real Estate [...]


On February 1st, 2011 | 10:05 am
Lindsey said:

I recieved a 1099-a from citimortgage and the fair market fair value is so over the top it’s not even funny. Is there a way i can make them correct it to where it should be in this worlds reality.


On February 1st, 2011 | 10:11 am
Diane Kennedy said:

Lindsey, you can try. I wish I could say that they have to change it, but chances are they won’t. My suggestion is to get a broker’s letter showing a realistic value.


On February 1st, 2011 | 10:12 am
Diane Kennedy said:

Please join us Saturday, February 5th for a FREE teleseminar “You Just Got a Form 1099-A (or 1099-C) Now What? Sign up at http://www.DianesSeminars.com


On February 5th, 2011 | 11:04 am
Laurie said:

Just finished listening to the free teleseminar. Thank you so much! It was very informative. I had some followup questions.

Am I right in that a 1099-A is basically for information purposes only, and that a 1099-C is the form that will affect my taxes? Do I report a 1099-A? Do you know how this is handled if the 1099-A was sent to a married couple, and we are now divorced?

Thank you very much!


On February 5th, 2011 | 2:21 pm
Diane Kennedy said:

Laurie says: “Just finished listening to the free teleseminar. Thank you so much! It was very informative. I had some followup questions.

Am I right in that a 1099-A is basically for information purposes only, and that a 1099-C is the form that will affect my taxes? Do I report a 1099-A? Do you know how this is handled if the 1099-A was sent to a married couple, and we are now divorced?”

The Form 1099-A has information you need to report the disposal of the property, if it’s an investment property. If it’s your primary residence, you’re right - nothing that you need to do.

If a property was owned by two people who later divorced, you need to look to the property settlement. Who got the property through the divorce proceedings? That is the person who will need to report the disposal (if applicable) and Form 1099-C, also if applicable.


On February 7th, 2011 | 11:59 am
Frank said:

Hi Diane,

Sorry for missed your seminar. I have one Deed-in-lieu that bank issued 1099-A, should I expect 1099-C?

For another Ded-in-lieu, bank only issued 1099-C but with $0 as FMV of the property. Shoud I expect or ask for 1099-A or simply report it as “$0″ for the sold price on the tax report? thanks!


On February 7th, 2011 | 1:53 pm
Diane Kennedy said:

Frank says: “I have one Deed-in-lieu that bank issued 1099-A, should I expect 1099-C?

For another Ded-in-lieu, bank only issued 1099-C but with $0 as FMV of the property. Shoud I expect or ask for 1099-A or simply report it as “$0″ for the sold price on the tax report? thanks!”

On the first DIL - ask your lender whether they will be sending a Form 1099-C.

On the 2nd, I would definitely use the $0 FMV as the disposal income so that you can report that as the ’sales’ price on either Form 4797 or Schedule D. The COD income will be taxable as ordinary income.


On February 24th, 2011 | 1:09 pm
Megan Hughes said:

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On May 12th, 2011 | 12:30 am
Form 1099-A, Form 1099-C and Tax Issues with Dumping Real Estate | USTaxAid Services said:

[...] Form 1099-A, Form 1099-C and Other Tricky Tax Reporting on Dumping Bad Real Estate [...]