Form 1099-A, Form 1099-C and Tax Issues with Dumping Real Estate

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We’re into the 3rd year or so of depressed real estate prices and as unemployment continues, some people simply can’t hang on to their upside homes and/or vacant real estate investments.

It’s a hard decision to walk away and often it’s not that easy to actually get done. The surprise a lot of people discovered over the past few tax seasons, though, was that it could almost mean you owe some taxes you didn’t expect to! That tax due comes from Cancellation of Debt (COD income).

The way it’s supposed to work is that if a property is picked up in foreclosure or there is a deed-in-lieu of foreclosure, the lender will give you a Form 1099-A. This will show you the approximate value of the property and the debt on the property.

If the debt isn’t forgiven, then they intend to come after you for the difference between what the value is and the debt.
So, let’s say an investment property is worth (according to your best guess and/or the Form 1099-A value) $65,000. Your debt is $150,000 and your basis is $165,000. You’ll have a loss of $100,000 on the property that is reported.

At some point, the lender might forgive the debt. You’d then have taxable income of $150,000 less $65,000 or $85,000.
But then what happens if the bank doesn’t give you a Form 1099-A? Or if they do, it doesn’t have a fair market value listed?

That’s where it gets tricky and where I wish we’d see the IRS start enforcing the rules on the lenders. It’s left a lot of taxpayers in a bad spot not knowing how to report a transaction.

The next shoe to fall will be the foreclosure mill crackdown. With allegations of foreclosure fraud and deals that need to be unwound from GMAC, Chase, Bank of America and others, how do you also unwind your tax returns? I see a big mess heading our way.

One Comment

  1. John Trujillo says:


    I had an investment property in Colorado foreclose in August of 2011. The balance on my loan was $241,000 and the property foreclosed for $144,000. This left a deficiency balance of about $96,000.

    I started receiving calls from a collection agency who claims that the are collecting for Freddie Mac. They are asking for a settlement on the deficiency balance.

    In January of 2012 Freddie Mac sent me a 1099-A. But I have not received a 1099-C.

    1) What is going on here? Are they going to send me a 1099-C and forgive the debt? Or are they trying to collect what they can on it with the intention of sending the 1099-C later?

    2) If I do a lump sum settlement of say $6000 on the $96000 deficiency balance, can they or will they then still send a 1099-C for the remaining $90,000?

    3) I am including the 1099-A in my taxes this year, but will the IRS be expecting a 1099-C even though I don’t have one? Does this increase my chances of an audit?

    Thanks so much for your help.

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