In light of the increasing number of home foreclosures, loan modifications and bankruptcies, we tax preparers have been seeing a lot of Form 1099-A’s and Form 1099-C’s. A Form 1099-A is used to report “Abandonment of Property.” If you had a vehicle, machinery, or a house reposessed, the lender would report the transaction on this form once he/she received posession of the property. Once the actual debt is CANCELLED, and lender has forgiven the debt that is owed, then you would receive a Form 1099-C (Cancellation of Debt). If you’ve completed a loan modification with your lender, where a portion of the debt is forgiven, you will receive a 1099-C. It could be a few years between the time you receive the 1099-A and the 1099-C, but it’s important that you keep those forms for your tax preparation! If you had a bankrupcty, you may receive a 1099-C from the creditor, or you may not. To be safe, contact the creditors and ask if the form is forthcoming, especially if you changed your mailing address. I’ve seen these forms arrive to the taxpayer well after January 31 (when 1099s are due to the taxpayers), so it’s important to be proactive!
While there is usually no tax impact with a Form 1099-A, it does need to be reported on a Schedule D as a personal loss if it’s for a main home foreclosure. The amount on a Form 1099-C may or may not be considered taxable income, depending on the situation. If your debt was cancelled due to a foreclosure of your primary residence, the amount related to your principle indebtedness can be excluded from income by filing a Form 982 with your tax return. If the forgiven debt also includes monies that were NOT used toward your home (e.g., you took money out of your home to buy a boat, etc.), you have to take out that portion and include it as income. If you incurred the 1099-C due to a bankruptcy or insolvency, you can exclude the debt on the Form 982.
If the Cancellation of Debt was due to a business debt, or for a foreclosed property that was used for business (i.e., rental property), then the treatment is different. You would have to claim the cancellation of debt income, but it would be offset by the business loss of the property. Always check with your tax professional on how to treat these ocurrences.