Cancellation Of Indebtness
Cancellation Of Indebtness (1099-C) Income Tax Issues
It can be very difficult to sell real estate in this market. Sellers often find themselves dealing with a variety of issues, and many of them do not know what to expect next. Sellers also do not know what tax returns they will be getting from the lender. That is why they may not know if they have even received the form.
The 1099-A and 1099-C are two forms that have confused a lot of lenders. These forms may also confuse financial advisers and lawyers. The Internal Revenue Service has to be notified every time that property is sold or transferred. The seller receives a 1099-S from the Internal Service when the property is sold. This form is known as Proceeds From Real Estate Transactions. It is used to determine whether there was a loss or gain on the property sale. The seller will also receive a 1099-S if there is a deed in lieu of foreclosure or short sale.
There will no 1099-S issued during a foreclosure. Property is not willingly sold during a foreclosure. The seller will receive a 1099-A instead, which is known as Acquisition or Abandonment of Secured Property. The 1099-A will report the transfer date, balance of principle outstanding on the transfer date and the fair market value on the transfer date. The 1099-A is also used to determine whether there was a gain or loss on the property.
Many sellers believe that if the property is sold at a foreclosure auction, then there will be no capital gain. However, this is a very common misconception. There may be adjustments made to the cost. As a result of this, there may be capital gain. This can also cause tax liability that the seller may not be able to pay.
Many sellers know they will receive a 1099-C, which is a cancellation of debt because short sales have become very common. This form reports that the debt has been cancelled as the result of a deed in lieu of foreclosure or short sale. Many sellers would be surprised to find out that they may receive a 1099-C if the home is foreclosed. However, regardless of whether it is a foreclosure, deed in lieu of a foreclosure or short sale, the tax ramifications will be the same.
During the time that the borrower or seller obtained the loan in order to refinance or purchase the property, the loan proceeds were not a part of taxable income because the borrower was obligated to repay the lender. When the obligation to pay the lender is cancelled or forgiven, the amount that the borrower is not required to pay is considered income by the Internal Revenue Service. If the cancelled or forgiven debt is greater than $600, then the person is required to report this income to the IRS.
Some exclusions can be used to eliminate or reduce the cancellation of debt from taxable income. This includes things such as the seller becoming insolvent before the creditor agreed to have the debt forgiven or cancelled, or the debt gets discharged in bankruptcy. Additionally, the seller may also be eligible to get relief through the Mortgage Forgiveness Debt Relief Act, or MFDRA.
Any time that a property is transferred or sold, it must be reported to the Internal Revenue Service regardless of whether it is voluntary or involuntary. Form 1099-S is used in a short sale, traditional sale and deed in lieu of foreclosure. If there is a foreclosure, then a Form 1099-A will be used. The seller has the option of cancelling or forgiving the debt regardless of whether it is a foreclosure, short sale or deed in lieu of a foreclosure. If the debt is forgiven or cancelled, then a 1099-C will be issued.
If you have any questions about how these transactions are to be reported on your tax returns, then you should seek the help of a tax professional.