What to Do With Form 1099-A?

Form 1099-A, Foreclosure and Taxes

Man's hands filling his tax form
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A homeowner typically receives Form 1099-A from his lender after his home has been foreclosed upon. The information on the firm is necessary to report the foreclosure on your tax return. 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. 

Foreclosures and Capital Gains 

A foreclosure is treated the same as the sale of property tax-wise.

The former owner over the property must calculate his gain or loss on the property, but unlike with a normal sale, there's no "selling price." This is where Form 1099-A comes into play.

A number of readers have asked what they should do with the information found on Form 1099-A, including "IcelandorBust": 

"Our home was foreclosed on in July 2015. The bank sold it to a new owner in November 2015. We received a 1099-A in January. I have been unable to find a concrete answer as to what to do with this form." 

The Information on Form 1099-A

You'll need the selling date and selling price of the foreclosed property to properly report its "sale" to the Internal Revenue Service. Form 1099-A provides you with the date of sale and the "selling price" of the property. 

Taxpayers will use either the fair market value of the property or the outstanding loan balance on the property for the selling price.

Both these figures are reported on the form. The outstanding loan balance is found in Box 2. The property's fair market value is found in Box 4. 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 or a non-recourse loan.

The loan was probably a recourse loan if the bank 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 I have seen situations where a foreclosure results in a gain being reported—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. 

Reporting the Foreclosure

Assuming the foreclosed property was your personal residence, you must prepare and file Schedule D with your tax return. Use the date of the foreclosure in Box 1 of the 1099-A as your date of sale. Then indicate the selling price. This will be either the amount in Box 2 or the amount in Box 4.

Which box you'll use depends on the lending laws in the state where the property was located. State law determines whether the amount in Box 2 or the amount in Box 4 is your selling price, so check with a local tax professional to make sure you select the correct one.

 

The difference between the Box 2 and Box 4 is not your taxable gain on the foreclosure. Calculate your gain by comparing the “selling price” you used to your purchase price, which is your cost basis in the property. The purchase price and date can 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, which you can enter on Schedule D and on line 13 of your Form 1040 tax return.

Investment Properties

Use Form 4797 if the foreclosed property was a rental or an investment. I advise people who have foreclosed rental properties to seek assistance from a tax professional 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

Some homeowners might receive Form 1099-C instead of Form 1099-A if the lender both foreclosed on the property and canceled any remaining mortgage balance for which the borrower was personally liable. 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.

NOTE: Tax laws change periodically, and 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 is not a substitute for tax advice.   ​