Reporting a Form 1099-C on Your Tax Return

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Reporting a Form 1099-C on Your Tax ReturnThe second (or maybe third) wave of foreclosures is happening here in Reno. For years, people have been able to continue to live in their houses or rent them out and not make the payments.The real estate market has heated up quickly and the lenders are now foreclosing because they know they can at least cover their debt.

That also means you might be getting Form 1099-As or Form 1099-Cs years after you thought you would.

Here’s a question that I received at USTaxAid:

“Bought a house in 2004 near the peak of the RE market in Florida for $132K. Lived there until the end of 2007. This home was converted to a rental in 2008 and rented through the end of 2009. These resulted in rental losses and I took, cumulatively, $6K in depreciation. We’ll call this “House A.”
In 2007, moved into a new home after getting married. Lived in that home until mid-2010 and moved for a job in another city. This is “House B.” After several failed attempts to rent out both House A and House B, went into default. House B would be surrendered as a deed in lieu in 2013. 1099C was sent and classified as primary residence and avoided ordinary income hit.

Also in 2013, House A was foreclosed (abandonment) and I received a 1099A. Outstanding loan was shown as $122K and it showed a FMV of $120K (which it wasn’t remotely close to in reality). I did NOT report the 1099A as I didn’t think it was reported on taxes.

Now, in 2014, I received a late 1099C for the property showing debt forgiven of $109K. The house sold for $76K in October.

Questions –

Should I restate my 2013 taxes to include the 1099A?

Can I take the loss on sale of rental (4797?) or use for 982…or can I not take anything to offset the 1099C debt forgiveness income?”

Answer: There is a lot of confusion when the Form 1099-Cs show up late. In this case, report the COD income in 2014.

This is a real estate investment property, so I’m guessing you have basis of $132,000 less $6,000 depreciation. You might have some additional costs for improvements or repairs that you hadn’t reported. If the property sold for $76,000, the loan amount at time of foreclosure was $122,000 and now you have $109,000 of forgiven debt, that means there were some additional costs.

Here’s the math:

$76,000 sales price
-122,000 loan

= $46,000 forgiven

However, the amount forgiven was $109,000, so there must have been $63,000 in additional costs. ($109,000 – $46,000)

You can contact the lender to confirm the information, based on the loan amount at the time of foreclosure and determine what happened with Form 1099-C. They might have made a mistake.

If you want to go ahead and report this COD income as is, you’ve got income of $109,000 and you have a loss of

$76,000 sales price
$195,000 basis ($109,000 + $63,000)
+ 6,000 depreciation recapture

That ends up totaling $125,000.

That means you actually have a total loss from this transaction ($125,000 – $109,000). The reporting is a little tricky though. I recommend you get a tax professional to help you with that.

Real estate tax is tricky. Make sure you work with a qualified CPA who is experienced in tax matters.

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