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1099-A and 1099-C after foreclosure and/or bankruptcy

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  • 1099-A and 1099-C after foreclosure and/or bankruptcy

    Around tax time, this is a frequent question and the banks are starting to get their act together and issuing these IRS forms more frequently.

    Let's start with the easier one first.

    1099-C: relates to what the IRS calls forgiven debt income. Simply, if you owe $50,000 and settle it for $10,000, the IRS considers the difference, $40,000 as income. Now, although the IRS code does not "require" banks to issue a 1099-C on debt discharged in BK, the code does not forbid it. As such, many banks will issue 1099-C (especially mortgage lenders) on debt discharged in BK (it is simply easier for the banks computers). 1099-C's are easy to handle in the BK context. Simply fill out IRS Form 982 with your taxes. The form 982 is how you inform the IRS that you filed BK and discharged the debt in question and therefore not liable to pay tax. Don't waste your time and energy trying to get the bank to rescind it, they don't have to. (and even if you think the 1099-C is inaccurate, who cares, you discharged the debt in BK).

    1099-A's are specific to real estate. A 1099-A reports to the IRS that a "transfer" of real estate occurred. A 1099-A is related to capital gains tax. For example, if you bought a house for $150,000 and sold it 8 years later for $250,000, you have a capital gain of $100,000 and that gain is "potentially" taxable. If you surrendered your house in BK and had a foreclosure (or simply had a foreclosure without BK), the bank still issues a 1099-A because a foreclosure is still a "transfer" of real estate. Now, if the property was your primary residence, you can basically ignore the 1099-A. After all, the exemption for having to report a cap-gain is $250,000 for single, and $500,000 for married. It is highly unlikely (virtually impossible) that a debtor would realize a $250,000 profit in a BK and foreclosure scenario. Unfortunately, you cannot claim a cap-loss on a foreclosure.

    Now, if the property in question was an investment property (or if you rented your primary residence for a majority of time over the prior 5 years), you have a little work to do. You will need to figure out your adjusted basis. Although unlikely, it is mathematically possible to have a cap-gain on a foreclosure. If the debtor had been depreciating the property each year, it is possible that the adjusted basis (value) after depreciation of the property would be less than the foreclosure sale value. See IRS publications 544, 551, 4681.

    So, nothing you really need to freak out over, if you get a 1099-C, simply fill out form 982. If you get a 1099-A, you can practically ignore it unless the property was an investment property of some kind.

    EDIT: Incidentally, the form you use for 1099-A is simply IRS 1040, schedule D, but if you have no gain or no reportable gain then you don't need to do anything.
    Last edited by HHM; 02-09-2013, 11:20 AM.

  • #2
    thank you so much hhm for taking the time to explain. i know many are confused upon rec'ing these 1099's and your clarification will aid them in understanding what they are and what to do!
    8/4/2008 MAKE SURE AND VISIT Tobee's Blogs! http://www.bkforum.com/blog.php?32727-tobee43 and all are welcome to bk forum's Florida State Questions and Answers on BK http://www.bkforum.com/group.php?groupid=9

    Comment


    • #3
      I have read and re-read the explanation packet for Form 982 (Form 4681?) and it is damned confusing. On one hand it says if you're involved in a Title XI proceeding, then you're exempt, but it also says that you have to shor your insolvency, and when I run mine it looks like a portion will be taxable. Who knows.

      --13for60
      Filed Chapter 13 - 10/05/10
      341 Scheduled - 11/10/10

      Comment


      • #4
        Originally posted by 13for60 View Post
        I have read and re-read the explanation packet for Form 982 (Form 4681?) and it is damned confusing. On one hand it says if you're involved in a Title XI proceeding, then you're exempt, but it also says that you have to shor your insolvency, and when I run mine it looks like a portion will be taxable. Who knows.

        --13for60
        There are instruction with form 982 that should help.

        Line 1b
        The insolvency exclusion does not apply to any discharge that
        occurs in a title 11 case.
        It also does not apply to a discharge of
        qualified principal residence indebtedness (see the instructions
        for line 1e on page 4) unless you elect to have the insolvency
        exclusion apply instead of the exclusion for qualified principal
        residence indebtedness
        http://www.irs.gov/pub/irs-pdf/f982.pdf

        They are two separate exclusions. Either the cancelled debt is excluded because the debt was discharged in bankruptcy or because you were insolvent at the time the debt was cancelled. If the debt was discharged in BK, insolvency doesn't apply.

        ETA:

        From Publication 4681:

        Bankruptcy
        Debt canceled in a title 11 bankruptcy case is
        not included in your income. A title 11 bankruptcy
        case is a case under title 11 of the United
        States Code (including all chapters in title 11
        such as chapters 7, 11, and 13), but only if the
        debtor is under the jurisdiction of the court and
        the cancellation of the debt is granted by the
        court or occurs as a result of a plan approved
        by the court.
        How to report the bankruptcy exclusion. To
        show that your debt was canceled in a bankruptcy
        case and is excluded from income, attach
        Form 982 to your federal income tax return
        and check the box on line 1a. Lines 1b through
        1e do not apply to a cancellation that occurs in
        a title 11 bankruptcy case. Enter the total
        amount of debt canceled in your title 11 bankruptcy
        case on line 2. You must also reduce
        your tax attributes in Part II of Form 982 as explained
        under Reduction of Tax Attributes, later.
        http://www.irs.gov/pub/irs-pdf/p4681.pdf
        Last edited by LadyInTheRed; 02-07-2013, 05:09 PM.
        LadyInTheRed is in the black!
        Filed Chap 13 April 2010. Discharged May 2015.
        $143,000 in debt discharged for $36,500, including attorneys fees. Money well spent!

        Comment


        • #5
          Title XI is bankruptcy. You don't need to show both. If you discharged the debt in BK, all you need to do is check box 1(a), fill in the total amount on line 2, and you are done.

          Note, I assume we are talking about a 1099-C?

          Comment


          • #6
            I will fill in line 2 the total amounts on the petition. The total liabilities on the "summary of schedules" or the amounts on form 1099-C ?
            Thank you.

            Comment


            • #7
              Thank you! (You should make this a sticky) Thanks to tobee43 for pointing me in the right direction!
              CH13 - filed 30 JUL 09, $1521 @ 60 mos (100% payback)
              Done!!! - 01 Jul 2014 I'm free!! Discharged 9/23/14!

              Comment


              • #8
                Originally posted by zeezee View Post
                Thank you! (You should make this a sticky) Thanks to tobee43 for pointing me in the right direction!
                lol! it is a sticky! and you are most welcome!
                8/4/2008 MAKE SURE AND VISIT Tobee's Blogs! http://www.bkforum.com/blog.php?32727-tobee43 and all are welcome to bk forum's Florida State Questions and Answers on BK http://www.bkforum.com/group.php?groupid=9

                Comment


                • #9
                  Thank you so much for posting this -- our attorney couldn't even tell us what to do with the 1099A we just received!

                  Comment


                  • #10
                    funny thing is that many accountants don't know either! until now many have never even seen them. of course if they may know of them, but many have never dealt with them before.
                    8/4/2008 MAKE SURE AND VISIT Tobee's Blogs! http://www.bkforum.com/blog.php?32727-tobee43 and all are welcome to bk forum's Florida State Questions and Answers on BK http://www.bkforum.com/group.php?groupid=9

                    Comment


                    • #11
                      Great thread. I received one last year and was worried but my accountant explained it (not as well as you did).
                      Last edited by Johnworker1; 02-04-2017, 07:36 AM. Reason: clarification

                      Comment


                      • #12
                        "You must also reduce
                        your tax attributes in Part II of Form 982 as explained
                        under Reduction of Tax Attributes, later."

                        I've read through this section of publication 4681 and I do not understand what it means or how it applies to Chapter 7. I see no one talking about it here, but I need to know if anyone understands it before I share this information with my CPA (again). Thanks!

                        Comment


                        • #13
                          Originally posted by Chrysalis View Post
                          "You must also reduce
                          your tax attributes in Part II of Form 982 as explained
                          under Reduction of Tax Attributes, later."

                          I've read through this section of publication 4681 and I do not understand what it means or how it applies to Chapter 7. I see no one talking about it here, but I need to know if anyone understands it before I share this information with my CPA (again). Thanks!
                          Your CPA just needs to read the directions for Form 982.

                          From IRS Form 982 Instructions...

                          Qualified principal residence indebtedness
                          1. Be sure to read the definition of qualified principal residence indebtedness in the instructions for line 1e on page 4. Part or all of your debt may not qualify for the exclusion on line 1e but may qualify for one of the other exclusions.
                          2. Check the box on line 1e.
                          3. Include on line 2 the amount of discharged qualified principal residence indebtedness that is excluded from gross income. Any amount in excess of the excluded amount may result in taxable income. See Pub. 4681 for more information. If you disposed of your residence, you may also be required to recognize a gain on its disposition. For details, see Pub. 523, Selling Your Home.
                          4. If you continue to own your residence after the discharge, enter on line 10b the smaller of (a) the amount of qualified principal residence indebtedness included on line 2 or (b) the basis (generally, your cost plus improvements) of your principal residence.




                          Chapter 7 (No Asset/Non-Consumer) Filed (Pro Se) 7/08 (converted from Chapter 13 - 2/10)
                          Status: (Auto) Discharged and Closed! 5/10
                          Visit My BKForum Blog: justbroke's Blog


                          I am not an attorney. Any advice provided is not legal advice.

                          Comment


                          • #14
                            I gotcha, justbroke. I was trying to send him another email, and I like to understand what I'm talking about -- that's all. ;)

                            Comment


                            • #15
                              Originally posted by Chrysalis View Post
                              I gotcha, justbroke. I was trying to send him another email, and I like to understand what I'm talking about -- that's all. ;)
                              I think the directions for Form 982 are better than the information in Publication 4681. That's why I pointed to the Form instructions.

                              Personally, I don't know anything about "tax attributes" at all! That is probably the reason that I am not a tax specialist, enrolled agent, or certified public accountant.
                              Chapter 7 (No Asset/Non-Consumer) Filed (Pro Se) 7/08 (converted from Chapter 13 - 2/10)
                              Status: (Auto) Discharged and Closed! 5/10
                              Visit My BKForum Blog: justbroke's Blog


                              I am not an attorney. Any advice provided is not legal advice.

                              Comment

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