Form 1099-A & Form 1099-C Problems

If you’ve recently gone through a foreclosure, deed-in-lieu of foreclosure, short sale or loan modification, you’re probably feeling pretty beat up and drained. It’s an arduous process that the banks seem to prolong as much as possible.

I wish I could tell you that you’re through with the problems from the upside down real estate you just cleared up.
There’s one more issue – taxes.

Yesterday we talked about the three steps for your taxes you need to do if you’re walking away from real estate. Then once you’ve determined what should happen, let’s talk about what might happen.
That’s because the lenders are notorious for not following the rules.

If you have property picked up in foreclosure, you’re supposed to get a Form 1099-A. You’re lucky if they even prepare a Form 1099-A (for some reason, a lot of the lenders our readers have dealt with don’t see to even understand the basic rules for a foreclosure). And then, there’s a good chance that they will mail it to the address of the property that isn’t yours anymore

If you had a property foreclosed on or did a deed-in-lieu-of foreclosure, you should get a Form 1099-A by January 31st of the year following. If you don’t get one, call them. You may find that they refuse to talk to you unless you bring the note current. Or you might find that they think they don’t owe you a Form 1099-A.
In both cases, they’re wrong, but what are you supposed to do?

PROBLEM: No Form 1099-A, and there should have been one.

If you should have, and didn’t, contact the lender. Hopefully they can get you a copy out right away.

If they won’t give you a Form 1099-A and they should have, really isn’t anything to report unless there is Cancellation of Debt. (next item) BUT make a note of it in an attached statement to your tax return. If there’s reporting you should have done and didn’t or couldn’t because they didn’t do what they were supposed to do, make sure the IRS and your state are on notice that it’s not your fault.

PROBLEM: Form 1099-A issued with wrong information or in error.

If you get a Form 1099-A that’s got bad information, contact the lender. If they won’t issue you a new one, the IRS says you’re supposed to call them.

PROBLEM: Form 1099-A issued, but no Form 1099-C.

(1)You didn’t really have Cancellation of Debt (COD).

(2)The lender knows you have a Form 982 exclusion.

(3)The lender doesn’t know what they’re talking about.

Of all of those, I think #3 is the one I hear about the most.

If you and your experienced tax/legal advisor believe that you did indeed have COD, then report the income as other income or on Form 982 using your estimate of Fair Market Value or the amount reported on Form 1099-A.

Got a question? Leave a comment here. We’re covering Tax Strategies for Real Estate Investors this week – how to pay less tax in good markets and in bad.