I Received a 1099-A After Foreclosure, But Not a 1099-C, What Does That Mean?

Question:

We received a 1099-A for our house that foreclosed in February, 2009. We have not received a 1099-C? Do we need to file something with the 1099-A? When should we expect a 1099-C? We have already filed our taxes for 2009 and would need to amend them for this, but haven’t received a 1099-C so what should we do? It is almost tax deadline & I am getting worried.

Answer:

Mortgage lenders use IRS Form 1099-A to inform the IRS that a foreclosure (or abandonment) of real property has occurred. That is a separate, potentially taxable event than what a 1099-C is used for, forgiving debt.

For a 1099-A you will want to refer to IRS publication 544 Sales And Other Disposition of Assets (opens PDF file). For you, a form 1099-A is used to report a gain or loss on a sale or exchange of assets. Whenever certain assets are sold or transferred, e.g. stocks, investment properties, etc., there is a potential capital gain or loss that is a taxable event.

A form 1099-C is used to report forgiven debt. If a bank chooses to forgive debt, then so long as the forgiven amount is over $600, the IRS requires the bank to issue a 1099-C. If you receive a 1099-C, you will need to complete IRS Form 982 (opens PDF file). Unfortunately, in a foreclosure scenario, in most states, the banks may choose whether to forgive a debt. If the bank does not forgive the debt, then the deficiency balance remains a collectable, unsecured debt against you and the bank may take whatever appropriate, legal action to collect that debt.

If you have filed bankruptcy and received a discharge, then you may complete IRS Form 982 even though the bank has not issued a 1099-C. Bankruptcy discharges the underlying deficiency balance on a foreclosure thereby making the deficiency not taxable income. A common strategy for dealing with foreclosure (or short sale) deficiencies is for the individual to file bankruptcy.