What to Do With Form 1099-A?

Saturday February 27, 2010

When a house is foreclosed upon by the bank, the owners typically receive Form 1099-A from the lender showing several pieces of relevant information. The information on Form 1099-A will likely be needed to report the foreclosure properly on your tax return. A foreclosure is treated as the sale of property, and the former property owner will need to calculate their gain or loss on the property. But unlike a normal sale, there's no "selling price," and this is where the Form 1099-A comes into play. What to do with the information found on Form 1099-A has been asked by a number of readers, including "IcelandorBust," who posted this query on the message boards:

"Our home was foreclosed on in July 2009. The bank sold it to a new owner in November 2009. We received a 1099-A in January. We have not received a 1099-C. I have been unable to find a concrete answer as to what to do with the 1099-A."

Under the rules for calculating the tax consequences of a foreclosure, the taxpayer will need figure out the "selling price" so that gain or loss can be calculating. Depending on the type of loan, the taxpayer will utilize either the fair market value of the property or the outstanding loan balance on the property for the selling price. Both of these figures are reported on Form 1099-A. The outstanding loan balance is found in Box 2; the property's fair market value is found in Box 4. The date of the foreclosure is indicated in Box 1, and this will be used as the date the property was disposed of (that is, the "sale date"). Taxpayers will also need to know if the loan was a recourse or a non-recourse loan; the loan was probably a recourse loan if the bank has checked "yes" in Box 5 which asks "Was borrower personally liable for repayment of the debt?"

People might receive multiple Forms 1099-A (one from each lender) for a single property. People might also receive Form 1099-C instead of Form 1099-A if the lender both foreclosed on the property and canceled any mortgage debt for which the borrower was personally liable.

Gain or loss is reported on Schedule D for homes that were personal residences. As a reminder, the IRS does not allow people to claim a loss on personal residences. Any gain (and I have seen situations where a foreclosure results in gain being reported) on personal residences can be offset by the capital gains exclusion for a main home.