Not All States Follow Feds Lead on COD Income Tax

This post is in: Business


If you’ve gone through a foreclosure, loan modification, deed-in-lieu-of or short sale, then you’ve probably also gotten a Form 1099-A and/or Form 1099-C.

There’s a lot of confusion on the part of the people who get the forms. What do you report and when?

Then there’s the added wrinkle that the lenders seem to be even more confused then the borrowers are.

Here’s how it is supposed to work:

If your property is foreclosed on or you do a deed-in-lieu of, you will get a Form 1099-A. This shows an estimated fair market value, indicates where there is recourse to you on the debt and shows the debt.

If the lender also forgives part of the debt, then you will get a Form 1099-C. This shows the Cancellation of Debt amount.

If you don’t get a Form 1099-C, it could mean:

  • The debt wasn’t forgiven.
  • The lender sent it to a wrong address.
  • The lender doesn’t know what they’re doing.
  • You have notified the lender that you are going through a bankruptcy.

The problem is that you are left in limbo. Is the debt forgiven or not?

If you don’t get a Form 1099-C and believe you should have, call the lender. You might be one of the rare few who actually get the lender to call you back. Most of the people we’ve heard from haven’t been so lucky.

It is possible get to a Form 1099-C on a first mortgage, but not on a second. That often indicates that the lender for the second is planning on coming after you with a default judgment. If you’ve refinanced the property, the chances are good that he’ll try. Talk to a local attorney if you have a concern you’re falling into this trap.

If you do get a Form 1099-C showing taxable income for the forgiven debt, you still may be able to avoid tax by filing Form 982 and claiming that you have an exemption because it was your personal resident, you are insolvent or you are in bankruptcy.

Please note, though, that this is good ONLY for federal tax. Your home state or the state in which the property was located may still assess you tax on the Form 1099-C (cancellation of debt) income.

Watch out if the property is in one of these locations:

  • Connecticut
  • Florida
  • Georgia
  • Indiana
  • Maryland
  • Massachusetts
  • Minnesota
  • New Jersey
  • New Mexico
  • Ohio
  • Oklahoma
  • Rhode Island
  • Washington DC

Now more than ever you need to have a tax consultant who can help you understand the complex and changing tax laws.Contact Us. if you’d like to see how we can work with you.


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  2. jm says:

    Regarding the reduction in tax attributes on Form 982, in choosing to reduce the basis of the rental property short sold,(which generated the 1099c),assuming the insolvency exception applies, (and there is no other business associated with the rental property) –does the reduction in basis amount go on line 4 or 5 of 982??? Line 4 refers to business property and no instructions for line 5. Help ASAP!! thanks