What to Do With Form 1099-A
You Must Report the 1099-A Information But You Might Not Take a Tax Hit
Homeowners will typically receive an IRS Form 1099-A from their lender after their home has been foreclosed upon. The information on the form is necessary to report the foreclosure on your tax return—and yes, unfortunately, you must do so.
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
The Internal Revenue Service treats a foreclosure just the same as if you had sold your property. You'll have to 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.
The Information on Form 1099-A
You'll need the selling date and the selling price of the foreclosed property to report its "sale" to the IRS, and you'll find this information on Form 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 is found in box 2 of the 1099-A, and 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 "sale date."
Taxpayers must also know if the loan was a recourse loan or a non-recourse loan. The loan was probably a recourse loan if the lender has checked "yes" in box 5, which asks "Was borrower personally liable for repayment of the debt?"
A recourse loan allows the lender to pursue you legally for any outstanding balance of your loan remaining after it's foreclosed upon and sold your property.
Do You Have a Gain or a Loss?
Capital gains are reported on Schedule D for homes that were personal residences. The IRS doesn't allow taxpayers to claim losses on personal residences.
Any gain—and yes, a foreclosure can actually 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, such as that you must have lived in the home for at least two of the previous five years.
Reporting the Foreclosure
Use the date of the foreclosure in box 1 of the 1099-A as your date of sale, then enter the selling price on Schedule D. 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 in which the property was located, so check with a local tax professional to make sure you select the correct one.
Calculating Your Gain
You can calculate your gain by comparing the “sales price” you used 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 13 of your Form 1040 tax return.
You must report this 1099-A information anyway, even if you're covered by the capital gains exclusion for your main 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.
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 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
You might receive Form 1099-C instead of Form 1099-A if your lender both foreclosed on the property and canceled any remaining mortgage balance that you owed.
In this case, the IRS takes the position that you received income from the foreclosure because you received money from the lender to purchase your home and you did not pay all that money back. It became money in your possession that you kept.
Forgiven debt reported on Schedule 1099-C is unfortunately taxable income. The Mortgage Forgiveness Debt Relief Act generally excluded mortgages canceled through foreclosure, but this provision expired on December 31, 2016.
The Bipartisan Budget Act breathed new life into it in February 2018. It was reinstated retroactively to cover tax year 2017, but Congress has not renewed it again as of August 2019.
The Mortgage Forgiveness Tax Relief Act is again pending in Congress as of 2019. It's part of the Tax Extender and Mortgage Relief Act of 2019, introduced by Senator Chuck Grassley (R-IA) in February. Unfortunately, the legislation remains stalled in the Senate as of August.
When You Can Exclude Form 1099-C Income
This provision still covers foreclosure agreements entered into from 2007 through 2017. You should qualify 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.
The IRS states in Publication 4681 that "if the debt is nonrecourse and you didn't retain the collateral, you don't have cancellation of debt income."
The information contained in this article is not tax or legal advice and is not a substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to federal law. For current tax or legal advice, please consult with an accountant or an attorney.