Ever since the real estate meltdown started in 2007, I’ve received tax questions about Form 1099C and Form 1099A. How do you report a Form 1099C? When do you report them? Is it taxable?
And ever so often, a case comes along like happened with this community member. Eight years after a foreclosure, he received a Form 1099-C. Now what?
Here is his question that he submitted at USTaxAid.com:
“In 2004 I purchased a rental property for 126 k. It was foreclosed on in 2008..The fair market value was 98 k and was purchased by someone for 78 k. In that same year I received a 1099-a for the 20 k deficiency. I paid the tax and all was good. Seven years later I received a 1099-c from the second mortgage holder who had been unsuccessful in collecting their second mortgage of 27 k .I know I’m responsible for paying the tax since I cannot qualify for any of the exclusions. This is my question: since I held the property for over one year and it was a capital asset. My contention is that this COD should be taxed at the 15% tax rate as a long term capital gain instead of my normal 25% rate. Do you agree? If so what form can I use on my 1040 ? I’m thinking form 8949 to calculate the capital gain then summarize on schedule D. Would love to hear your thoughts.”
You correctly reported the foreclosure and debt discharge of the first note when you received the Form 1099-A. That’s the form that a lender uses to report a foreclosure of real estate or repossession of personal property.
In the case of real estate, it may be a signal that you need to report the charged off debt. If the property is in a non-recourse state, the lender can’t come after you. Just based on definition of how the debt collection works in your state, you may be required to report the COD (cancellation of debt) income on your tax return.
There is now a Form 1099-C reporting that the second mortgage was forgiven and so there is COD income.
Regardless of how long you held the property prior to the discharge of debt, COD income is always reported as ordinary income. It’s reported as other income on the first page of Form 1040.
You mentioned that you don’t meet any of the exclusion parameters. If you did, you’d still need to report the Form 1099-COD but instead would use Form 982 to show that the income was not taxable.