IRS Form 1099-A is an informational statement that reports foreclosure on property. Homeowners will typically receive an IRS Form 1099-A from their lender after their home has been foreclosed upon, and the IRS receives a copy as well. The information on the 1099-A is necessary to report the transaction on your tax return.
The Internal Revenue Service treats a foreclosure just the same as if you had sold your property. You must calculate your capital gain or loss, but there's no "selling price" in this scenario, at least not in the same context as a normal sale when you might receive cash in hand after the transaction. You might also have to report any canceled debt as income.
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.
What Is Form 1099-A?
Form 1099-A reports the "Acquisition or Abandonment of Secured Property." You might have borrowed $150,000 to purchase your home, then encountered some financial difficulty and were unable to make the mortgage payments. 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's $125,000 in income to you.
Capital gains tax might also come due because the IRS takes the position that you "sold" the property.
Form 1099-A reports this transaction to the IRS, and you'll receive a copy as well 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 with the IRS and must also provide the borrower with a copy. It must provide copies to each borrower in situations where more than one individual or entity was responsible for paying the loan off. Each borrower is 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
Contact your lender if you don't receive a 1099-A by January 31 of the year following the year of foreclosure. 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 who you can reach out to with questions.
How to Read Form 1099-A
You'll need the selling date and the sales price of the foreclosed property to report the foreclosure to the IRS, and you'll find this information on the 1099-A. You'll use either the fair market value of the property or the outstanding loan balance at the time of the foreclosure for the sales price.
The outstanding loan balance can be found in box 2 of the 1099-A, and the property's fair market value is located in box 4. The date of the foreclosure is indicated in box 1, and this will be used as the selling date.
Taxpayers must also know if the loan was a recourse or a non-recourse loan. The loan was probably a recourse loan if the lender has checked "yes" in box 5 of Form 1099-A, which reads, "Check if the borrower was personally liable for repayment of the debt."
A recourse loan allows the lender to pursue you legally for any outstanding balance of your mortgage that remains after it's foreclosed upon and after it has sold your property.
Enter the sales price on Schedule D, "Capital Gains and Losses," which should accompany your Form 1040 tax return when you file it. 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 where the property was located, so check with a local tax professional to make sure you select the correct one.
Capital gains are reported on Schedule D for homes that were personal residences. The IRS doesn't allow taxpayers to claim capital losses for personal property.
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, so it’s unlikely that a foreclosure will result in any capital gains tax coming due. You'd have to realize several hundreds of thousands of dollars in "profit" before the capital gains tax would apply.
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 “sales 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.
The difference between the selling price and your cost basis is your gain. Enter this on Schedule D and on line 6 of your 2019 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 you must take additional factors into consideration, such as recapture of depreciation deductions, passive activity loss carryovers, and reporting any final rental income and expenses.
You must report this 1099-A information even if you're covered by the capital gains exclusion for your primary residence, but you won't take a tax hit unless your gain is more than $250,000 or $500,000, depending on your marital status.
Form 1099-A vs. Form 1099-C
You might receive Form 1099-C instead of or in addition to Form 1099-A if your lender both foreclosed on the property and canceled any remaining mortgage balance that you owed. Forgiven debt reported on Schedule 1099-C is unfortunately taxable income.
You might qualify to exclude it, however, 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'd only have to report $20,000 as income—the amount exceeding your $100,000 insolvency.
If a debt is nonrecourse and if you didn't retain the collateral, you don't have cancellation of debt income, according to the IRS.
If you are experiencing financial difficulties, the CARES Act, enacted by Congress may offer you additional protections against foreclosure. Check with your lending institution to see if you qualify.
- Form 1099-A reports the "Acquisition or Abandonment of Secured Property” to the IRS when you lose a property to foreclosure.
- The lender must send a copy to both the IRS and to each borrower on the loan.
- Borrowers are potentially liable for capital gains tax as well as income tax on any unpaid portion of a foreclosed mortgage.
- Borrowers must report Form 1099-A information on Schedule D of their tax returns as capital gains.