IRS Quietly Issues New Instructions for Reporting When You Dump Bad Real Estate


This post is in: Real Estate
3 Comments

In December 2011 and again in April 2012, the IRS has issued additional information about Form 982s, Form 1099-As and Form 1099-Cs.

irsThe way it’s supposed to work:

If you have property that you lose in foreclosure or deed-in-lieu of foreclosure, you are supposed to get a Form 1099-A. The form is supposed to indicate the total debt amount, which may or may not be right, the fair market value of the property, which is almost certainly wrong and whether the debt is recourse. In other words, whether the lender can come after you for any remaining debt after the property is sold. Then when the deal is done, if there is debt, the lender has the choice to write it off and send you a Form 1099-C with the Cancellation of Debt income. This is taxable to you, unless you qualify for one of the exclusions which need to be reported on Form 982.

We’ve seen hundreds of cases of wrong Form 1099-As and Form 1099-Cs and taxpayers left wondering how to report.

The IRS has issued new instructions for Form 982, which clarify this all a little bit.

The Form 982 gives you 4 exceptions to paying tax on COD income. I’m ignoring the special farm exemptions and other items. I’ll assume that this is real estate and it was either your principal residence, a vacation residence, an investment property or a rental property.

There is an exclusion from tax if the debt was associated with your principal residence and was original debt. If it’s a second mortgage, you may have a tax issue. And remember just because the IRS says it’s exempt, it doesn’t mean the state will say it is. If you get a Form 1099-C that relates to your principal residence and you don’t owe tax on the income, report it on Form 982.

There is also an exclusion if the property was listed in a bankruptcy or you were insolvent at the time of the property loss. If you receive a Form 1099-C, you will also need to report it on Form 982.

If you missed doing the Form 982 and there is a Form 1099-C that the IRS is now chasing with you, the good news is that you can go back and amend to file the Form 982 for these three instances: primary residence, insolvency or bankruptcy.

There is also another option on the Form 982 if you have COD income as a result of restructuring with your lender. This applies if you have a real estate business, so you have more than one property and they are investments or rentals. In this case, you can apply the COD write-down to reduce the basis on remaining property.

This Form 982 exception is tricky, though. You need to take this election with the original filing of your return, or within 6 months after you’ve filed it. You can go back after that and file an amendment.

Make sure you read the next USTaxAid article dealing with the rumored new IRS audit target for real estate investors.


3 Comments

  1. Diane Kennedy says:

    Hi Chet,

    I completely understand the confusion you’re facing.There are a few issues on why it’s hard: The lenders aren’t following the rules (and no one is making them), the IRS agents are poorly trained & give conflicting information and we’ve never seen this kind of tax and economic situation before. (They didn’t give out Form 1099-Cs in the Great Depression)

    If you receive a Form 1099-C, you have to report the COD income. You may have an exclusion and if so, use Form 982 along with your tax return.

    If you receive a Form 1099-A in a state that is non-recourse, the IRS has taken the position in audit that the non-recourse debt is the same as COD income. So you need to report it in that year.

    If you didn’t get a Form 1099-C, it could be because the lender hasn’t yet forgiven the debt, it could be because the lender received funds from the feds and so had no debt to forgive or it could be because their records are so messed up, they can’t proceed.

    My suggestion is to have a tax preparer help you with your return this year, at a minimum, but make sure they have experience with Form 1099-A and Form 1099-C and know the underlying tax consequences.

  2. chet says:

    I am having a had time finding some answers which this article hits in the right direction of.

    I had a fairly large residential rental business that consisted of all single family homes (24). I have received only 4 1099C’s and the rest are all 1099A’s. This was my only income and no other assets. I have called the IRS several times but don’t get much help just complicated answers.

    What I’m trying to understand right now is the IRS told me that only 1099C’s are considered income and the 1099A’s are debt you are still liable for and not taxed. He told me you report the 1099A’s as income after the lender sends you the 1099C’s after they sell the property. Is this true and if so do I report the 1099A’s on my taxes at all?

  3. BH says:

    Thank you. I have an example that I’m trying to figure out. Received at 1099-C for 100K. Original loan 450K, refinanced and took 100K out of the house…so there is a new loan of 550K. How does the 100K be accounted? Not all the money was used to go back into the house, some was used to pay off CC debt, etc. Is the 982 required? Also, is it possible to use the capital gains rule with the 1099-C?

    Thanks!
    BH

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