Whenever a lender repossesses a property through a foreclosure or deed in lieu of foreclosure, it must file form 1099-A with the IRS and send a copy to the borrower. If the lender forgives all or part of the debt in the process, however, it may instead file form 1099-C. Borrowers who receive either form may be liable for taxes if they profit from the sale of the property or from canceled debt.
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Coordination of Forms 1099-A and 1099-C
Lenders file form 1099-A to document the difference between the amount of the debt owing on a property at the time of repossession and the fair market value of the property. A difference between these two amounts could result in taxes for the borrower under certain circumstances. If a lender cancels all or part of a loan, however, it must file form 1099-C to document the forgiven amount; the borrower may also have to pay taxes on this amount. Form 1099-C duplicates the information on form 1099-A, so when form 1099-C is required, there is no need to file form 1099-A.
Taxable Items on Form 1099-A
When property secured by a loan is repossessed, the lender reports the outstanding loan amount in box 2 of form 1099-A, and the fair market value of the property in box 4. When the amount in box 4 is greater, it means there was a net profit from the sale, and any of that profit
that goes to the borrower is taxable. If, on the other hand, the amount in box 2 is greater, it means the lender took a loss. The borrower still owes the deficient amount, and it isn't taxable unless the lender forgives it.
Form 1099-C supersedes form 1099-A when the lender cancels all or part of a deficiency. At its discretion, a lender can file both forms if it wishes, but the IRS doesn't require it, and most lenders don't. Consequently, you may receive form 1099-C after a foreclosure or deed in lieu. If you do, you are liable for taxes on the amount shown in box 2 of that form, and must fill out and file form 982 with your tax return and include the amount of the canceled debt in your gross income.
If, after a foreclosure or deed in lieu, you receive only form 1099-A from the lender, it generally means you don't owe taxes unless you realized a profit from the sale of the property. If the sale was deficient, receiving a 1099-A from the lender means it hasn't forgiven the difference between the amounts in boxes 2 and 4; if the lender had forgiven the amount, it would have sent you form 1099-C. Even if you receive a 1099-C for canceled debt, the Mortgage Forgiveness Debt Relief Act of 2007 may exempt you from paying taxes on it if you used the home as your primary residence.