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1099A - Do you pay taxes if lender sends you this form?

Author: Jessica Bennet
Community Mentor
Ask Jessica
Posted on: 08th Feb, 2008 01:35pm
If your house goes into foreclosure and it sells for less than what you owe on the property, there will be a deficiency. As a borrower, you're liable to pay it off. In case, your lender forgives this deficiency, it'll be considered as your taxable income. You'll be sent a 1099-A Form by the lender and you'll have to report the income to the IRS. Similarly, if your lender modifies the terms of the loan and it results in cancellation of a certain portion of the debt, the cancelled debt amount will be taxed by the IRS.

What is 1099A Form and why is it sent to you?


Your lender is required to report the deficiency from the foreclosure or the short sale to the IRS for tax purposes. This is why they send you 1099-A Form, which is mainly for informational purpose. However, if you receive a 1099A Form, it doesn't mean the deficiency has been forgiven. The lender can come after you in future to collect the debt.

If the lender forgives the debt, you'll receive a Form 1099-C. It suggests that the remainder of the debt has been cancelled and the lender will not come after you to collect the debt. You'll be required to report this as your income on the tax return.

Is there an exemption from paying taxes on this income?


If the mortgage is a recourse loan, you will owe taxes to the IRS on the cancelled debt amount. But the Mortgage Forgiveness Debt Relief Act, 2007 does allow you to exclude the cancelled debt amount from your gross income under certain conditions.

However, in case the mortgage is a non-recourse loan, the lender cannot come after you to collect the deficiency. They have to be satisfied with whatever they get from the sale of the collateral. So, even if there's a deficiency, it will not be considered as your cancellation of debt income. Thus, you will owe no taxes to the IRS due to the deficiency on the non-recourse loan.
Posted on: 08th Feb, 2008 01:35 pm
iT SHOWS WHAT WE OWED AND WHAT THEY SAY WAS FAIR MARKET OR REALY WHAT IT SOLD FOR AT THE AUCTION. SO THE DIFFERENCE WOULD BE INCOME RIGHT? CAN I USE THAT AS A LOST ON MY INCOME TAX FOR MY HOME? NEED HELP
Hi lindaplus,

I think you should consult with a tax assessor.

BTW losses on acquisitions or abandonment of property which is held for personal use are not deductible.

Best of luck,
Larry
Posted on: 08th Feb, 2008 02:12 pm
Hi,

A tax assessor won't be the right person here. Instead, it has to be a tax advisor with whom you should consult if required.

The deficiency that is difference between the loan balance and the sale price should be paid off within a time period. In case you can't, it won't be taxed as per the Mortgage Debt Forgiveness Tax Relief Act . So, you need not worry about the taxes on the canceled debt.

Even if the form 1099A shows it as your income, that is, just for reporting to the IRS. You will have to file your taxes with the form 1099A and then you'll get a deduction on the whole.

Hope this helps...

God bless you.

Samantha
Posted on: 09th Feb, 2008 12:55 am
There are so many loopholes in this whole Mortgage Debt Forgiveness Tax Relief Act. It could be a blessing for most of us and for some it makes no difference. If money is tight, look for someone who can give you a free consult. Depending on your situation even if you do not qualify under the new law, you may be able to prove insolvency. I am not at all a tax expert. I have been researching this for months now. I sold my home through a short sale and my lender never sent me a 1099. I have been searching for answers but I will have to speak to a professional as well.

I usually file our taxes every year using TurboTax. This year though may be different. I see no forms on there that would pertain to these problems.

Best of luck to you.
Posted on: 09th Feb, 2008 11:51 am
"There are so many loopholes in this whole Mortgage Debt Forgiveness Tax Relief Act"
Hey girlindebt, I don't find loopholes, the only thing being in doubt is, whether it will continue after 2009. what loopholes do you see here?
Posted on: 10th Feb, 2008 11:40 pm
The bill only applies to a “principal residence”. Investment properties and second homes in a short sale situation are not going to be eligible. So what does the IRS consider a "principal residence"? The answer is tricky. I know in my case, I lived in the house less than 5 years...actually less than 2. It was my primary residence and not a second home or investment property. Maybe it is just me and I am not getting it but when I called the IRS the other night, I had to go through a "worksheet" to figure this out. They calculated the months I lived there and then went over the reasoning I had to sell my house. Based on my answers, I was told to file a form claiming I was insolvent and I wont be responsible for the taxes. Why do I need to go through all of that? Wouldn't that new law pertain to me?

Again, I am no accountant and maybe I could be reading this all wrong but this is very confusing.
Posted on: 11th Feb, 2008 04:25 pm
hi girlindebt,

under the irs rules, only a primary residence can qualify for mortgage debt forgiveness debt relief. as per the irs rules, a primary residence is one in which the owner should have 2 years of ownership and occupation or 730 days. but this need not be concurrent. there can be short vacations but that will be considered as period of use. however, 1 year of stay out of the home won't be counted as period of use or occupation.

since you've not stayed there for complete 2 years, probably that's the reason the irs suggested that you'll have to pay taxes. besides, there are other conditions under which one can get tax relief on canceled debt. these are:
  1. the debt should have been canceled by the lender in the years 2007 through 2012.

  2. the debt should have been taken to buy, build or improve a principal residence. second homes, rental property or vacations homes are not applicable here.

  3. the tax relief is limited to debt amount of $2 million.

  4. the forgiven debt related to cash-out refinance or home equity loan is divided between the amounts required for buying, building, improving home and amounts used for purposes like tuition, payments of other debts, etc. the allowable portion for tax break is then calculated.

so, yes, there are loopholes which are evident from the conditions stated above.

take care
Posted on: 11th Feb, 2008 11:41 pm
Unfortunately, a 1099M is like a W-2, it is a report of income for which you owe income taxes.

The IRS considers money that you were obligated to pay and did not, the sale was short of the total that was owed, as income and they demand that you pay taxes on the amount that was short paid in cash with your next tax return.

Now, the Mortgage Relief Act of 2007 relieves certain people of this absurd burden. Depending when your sale occurred; it only applies to the years 2007-2009, and if it was your primary residence in which you lived in at least 2 out of the last 5 years, you may be exempted.

I say maybe because if you did a cash out refinance, the money that you did not use to improve the house, that you spend on wine, men and song, would still count against you.

If the house was not your primary residence, you get no relief. Your only out would have been to have declared bankruptcy prior to the sale.

Hope this helps.

Bill
Posted on: 02nd Mar, 2008 10:13 am
Bill, you mean one has to file bankruptcy chapter 13 prior to the sale so that he need not pay tax on the canceled debt, provided he's does not qualify for mortgage debt forgiveness.
Posted on: 02nd Mar, 2008 10:58 pm
MAC_7

Correct!
Posted on: 15th Mar, 2008 06:39 am
WE HAVE RECD A 1099A FOR INVESTMENT PROPERTY IN WHICH OUTSTANDING BALANCE WAS FOR $436975.50 AND FMV IS $238,500. THE ORG LOAN AMOUNT IS FOR $370,000. WE SHOULD BE INSLOVENT DO TO LOST OF INCOME AND JOB FROM THE HOUSEHOLD. I ALWAYS HAVE STARTED THE PROCESS FOR BANKRCY BACK IN DEC 2008. I WANTED TO KNOW HOW WILL THIS CHANGE OUR TAXABLE INCOME? IF WE WIL HAVE TO PAY TAXES ON ANY OF THE AMOUNTS WHO MUCH WILL IT COULD BALLPARK FIGURE?
Posted on: 04th Feb, 2009 12:57 am
It will depend upon the type of bankruptcy you file. A bankruptcy attorney will be the best person to help you regarding this issue.
Posted on: 14th Feb, 2009 01:35 am
I lost my home to forclosure in 2008 and recieved a 1099-A form. The value of the hoem is less that what it shows I sold it for. Will I be taxed on this? Also being in MA will I be taxed by the state?
Posted on: 10th Mar, 2009 06:09 pm
Yes, you may have to pay capital gains tax for the sale of the property.
Posted on: 11th Mar, 2009 10:03 pm
I went into foreclosure in 08, filed chapter 7 in 08, discharged in 09 - house still sits empty...should I expedite and do dil...or let it run its course? home was in bk...but worried I may still be financially responsible..taxes...and HOA...I abandon the home before discharge.
please give me some direction...my bk attorney is not helpful
Posted on: 08th Apr, 2009 05:15 am
Hi katie,

You have mentioned that your property foreclosed in '08. If that is the case, then you will not be responsible for the property anymore as the lender might have sold the property and recovered the dues.

But, in case, you filed bankruptcy before the property was foreclosed, then did you reaffirm the mortgage?
Posted on: 09th Apr, 2009 12:29 am
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