Tax Problems with Dumping Bad Real Estate

This post is in: Real Estate


Over the past two years, the majority of questions that we’ve received at the USTaxAid Blog have to do with the tax consequences of dumping bad real estate.

It’s a hot topic, for sure, as millions of Americans have had to let go of property through foreclosure, deed in lieu of foreclosure, short sales or reduced the debt due through a loan modification. As traumatic as that was, the biggest shock occurs later as most of them discover they might have a tax issue.

We’re getting reports of people getting Form 1099-C forms years after the 2008 or 2009 property loss and wonder what to do with them. Is there tax due now years later? Or they are getting Form 1099-A with wrong or missing information. How is that supposed to be reported?

In today’s blog, I’ll go through some of the basics of tax issues with dumping bad real estate. But first I want to talk about one resource you, or someone you know in this situation, will want to take advantage of.

On Saturday, February 5, 2011 at 9 am PST, 10 am MST, 11 am CST or Noon EST, I’ll be hosting a very special teleseminar: “You Just Got a Form 1099-A or Form 1099-C… Now What?” The teleseminar is FREE and NO HYPE – just solid, good information you can use. Plus, we’ll stay on the line

If you need to know more information on the overly complicated tax issues surrounding foreclosures and other methods of dumping bad real estate, please make plans to join us. Go to DianesSeminars to register now.

There are one or two forms that lenders are supposed to give you if you’ve gone through a foreclosure, deed-in-lieu of foreclosure, short sale or loan modification.

Form 1099-A is used to report to you, and the IRS, when a lender has taken back a property. It should show the amount of the outstanding loan, a realistic fair market value and whether you are personally liable for the debt.
If it’s for a primary residence or a 2nd home, there is nothing further you need to do. If it’s an investment property (whether in service or not), you can use this to report the disposal of the property.

That sounds pretty straightforward, but lenders are creating all kinds of problems with this. Here are some of the problems we’re seeing:

  • Lender doesn’t issue the Form 1099-A.

    Suggestion: Call the lender. Be persistent. They have to provide a Form 1099-A if you’ve had a foreclosure or deed-in-lieu of foreclosure. If they still won’t comply with the law, report the disposal, using the best numbers you have available and include a footnote disclosure about why you don’t have a Form 1099-A.

  • Lender issues a Form 1099-A in the wrong year.

    Suggestion: We’re hearing more and more about lenders issuing Form 1099-As for foreclosures and deed-in-lieu of foreclosures that happened iin 2008 and 2009. Call the lender. Again, be persistent in explaining that they need to correct the Form 1099-A.

    I’m not sure you’ll have any success getting them to comply with the law, especially since it seems like the IRS is holding YOU not them accountable for their bad reporting. But, keep a good documentation of who you called, when and what happened.

    Report the Form 1099-A numbers, but then zero them out with a footnote disclosure. This is assuming that you had reported the foreclosure in the proper year. If not, talk to your tax advisor on your best course of action.

  • Lender issues a Form 1099-A with the wrong amounts.

    Suggestion: The biggest mistake we’re seeing is completely ridiculous fair market values. Of course, when the lender disposes of the property, they will issue you a Form 1099-C with the real amount and then you pay tax.

    Talk to real estate brokers in the area. What is a real value for the property? Once you have your facts straight, contact the lender. We haven’t seen a lot of positive help here, but realistically, you’re not expecting the lender to do anything about it. You’re laying groundwork in case the IRS challenges how you report the property disposal.

    If the valuation is obviously wrong and the lender refuses to change it, you can report a different amount. But just remember that you need to be able to prove it if the IRS asks. That might mean you need to get an appraisal of the true value.

Tomorrow, we’ll follow up with how to report a Form 1099-C and possible problems we’re seeing with that.

If you’ve gotten a Form 1099-A, or expect one, don’t miss Saturday’s FREE teleseminar: You Got a Form 1099-A (or 1099-C) – Now What? Sign up at DianesSeminars to ensure you get a spot.


  1. Laurie says:

    Hi Diane,

    I have multiple questions… My ex and I had had to “abandon” our primary residence in 2009, and in June of 2010 the house was foreclosed on. (Our divorce was final in April 2010.) I filed my taxes last week, and yesterday received a 1099-A from Wells Fargo. Now I’m thinking I should receive 3 of these because we had 3 mortgages on our house. The Fair Market Value is about $20,000 more than the loan amount (but it doesn’t take into consideration the amounts of the other 2 loans.) I don’t think the house has actually sold yet.

    1. Should we have received a 1099-A for the 2nd and 3rd mortgage, as well? 2. Will I have to file an amendment to my tax return? 3. Does this form indicate that we received some kind of gain, and will have to pay taxes? 4. How do I handle the amounts, since I am divorced?

    Sorry for so many questions! I really appreciate your advice.

  2. Sunni says:

    Found your blog post through Digg. You already know I will be subscribing to your rss.

  3. edward says:

    Hi Dianne,
    I live in Ca. My chapter 7 bankruptcy was discharged in aug 2009. I did not reaffirm my loan. I continued living in the house till June 2010 while tryingthe to work with lenders (GMAC and DITECH), in vain, they foreclosed. They first was 240,000 and the second 140,000. I have recieved a 1099-A from both lenders. The balance on principle outstanding is 226,000 and fair market value 244,000 (for the first) and balance outstanding 140,000 and fair market value 00.00 (for the second). What should I do with regards to my taxes (filing jointly), I was hoping that the bk would not require me to pay any gains taxes ( a double wammy)
    thnks for your generosity

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