An Example of Form 1099-A
Say you borrowed $150,000 to purchase your home, then encountered some financial difficulty. As a result, you couldn’t make your mortgage payments. The lender forecloses on your home. The IRS takes the position that if you still owed $125,000 at the time the lender foreclosed, and if you’re no longer liable for repaying it, that equals $125,000 in income to you. Your lender uses Form 1099-A to report this transaction to the IRS. You’ll receive a copy, too, so you can address the details on your tax return.
Who Uses Form 1099-A?
The lending institution is responsible for filing Form 1099-A and must also provide you with a copy. In situations where more than one individual or entity was responsible for paying the loan off, the lender must provide copies to each borrower. The borrowers are then responsible for reporting that information and their share of the transaction on their personal tax returns.
What To Do if You Don’t Receive Form 1099-A
You should receive a 1099-A by January 31 of the year following the year of foreclosure. If you do not, contact your lender. The institution has this long to provide you with a copy, although the form isn’t due to the IRS until February 28. You can also contact the lender if you think the information on your form is incorrect. The 1099-A statement should include the identity and contact information for an individual with the institution whom you can reach out to with questions.
How To Read Form 1099-A
Form 1099-A is a relatively simple form. The left side of the form includes the lender’s contact information and tax identification number (TIN), and your name, address, and loan account number. On the right side of the form, you’ll find the outstanding loan balance in Box 2 of the 1099-A. The property’s fair market value is in Box 4. The foreclosure date is in Box 1—this will be used as the selling date. The form indicates whether the loan was a recourse or a non-recourse loan. The loan was probably a recourse loan if the lender checked “Yes” in box 5 of Form 1099-A, which reads, “Check if the borrower was personally liable for repayment of the debt.” Box 6 is where the lender will describe the property, which often includes the property’s address. When filing Schedule D, you’ll need the selling date (date of foreclosure, for example) and the “sales price” of the foreclosed property to report the foreclosure to the IRS—you’ll find this information on the 1099-A. You’ll use either the outstanding loan balance at the time of the foreclosure (Box 2) or the fair market value of the property (Box 4) for the sales price. Which box you’ll use will depend on the lending laws of the state where the property was located, so check with a local tax professional to make sure you select the correct one.
Requirements for Reporting a Capital Gain or Loss
Any gain—and a foreclosure can occasionally result in a gain—can usually be offset by the capital gains exclusion for a main home. Also called the “Section 121” exclusion, this tax break allows single individuals to realize up to a $250,000 gain on their personal residences without being subject to the capital gains tax. The threshold increases to $500,000 for married taxpayers, but several rules apply to qualifying; for instance, you must have lived in the home for at least two of the previous five years. You can calculate your gain by comparing the sale price to your purchase price, which is your cost basis in the property. This information can typically be found on the closing statement you received when you purchased the property. Enter this on Schedule D of your 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 you must take additional factors into consideration, such as the 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 or both a 1099-A and 1099-C if your lender canceled any remaining mortgage balance that you owed. Forgiven debt reported on Schedule 1099-C is taxable income. The canceled debt might not be taxable, however, if the total value of your debts exceeded the total value of your assets immediately before the time of foreclosure. This means that you were 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 of your remaining assets might be 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’d only have to report $20,000 as income—the amount exceeding your $100,000 insolvency.
