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1099 C

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3 minutes ago, doucar said:

I received a 1099-C for 2017 for my home which was foreclosed upon on 2015, How do I report this without paying a boatload of taxes.  I believe I also received the same form for 2016.


You probably received a Form 1099-A earlier for the foreclosure. There are two tax events that can occur in a foreclosure action.


The foreclosure itself results in a sale of the home in order to get the lender cash to pay towards the mortgage loan. That foreclosure is treated like a sale of the home for the value of the property at the time of the foreclosure. Thus, the taxpayer realizes a gain or loss on that sale. That information is generally provided on a Form 1099-A. The gain or loss is generally figured by taking the value of the home reported on the Form 1099-A (or, if the taxpayer disputes the value and has a good argument for a different value, the taxpayer uses that value) and subtracting from that the taxpayer’s adjusted basis in the home. Of course, many foreclosures on personal residences result in tax loss, and a loss on personal residence is not deductible. It should have been reported anyway on the return for the year in which this occurred, but if there was a loss then there is no tax consequence and it won’t matter.


After the foreclosure sale the amount of the loan left unpaid may end up being discharged by the lender or by a nonrecourse provision in the state law. If the former that is generally taxable income to the debtor under IRC § 108. If the latter the discharge under state law is not treated as a discharge of debt for federal income tax purposes. Either way the lender is going to send a Form 1099-C. While generally a discharge of debt by the lender is taxable income, there are two exceptions that may apply for a discharge of a mortgage debt on a personal residence.


The first exception excludes a discharge of “qualified principal residence indebtedness”. However, for that to apply the discharge must have occurred prior to January 1, 2017 or there had to be a written agreement in place for providing that discharge prior to that date. A Form 1099-C issued for 2017 suggests the discharge occurred in 2017 and if that is the case you would not be eligible for that exception. But if you can confirm the discharge occurred earlier than that, this exception may help you.


The second exception is the insolvency exception. Under that exception the debt discharged is not income to the extent you were insolvent on the day of the discharge. Where I do not know the exact date of the discharge for the client I typically use the last day of the year unless the taxpayer‘s financial situation had changed significantly during the year, in which it becomes more important to try to pin down the exact date, if possible. For example, suppose the discharged amount of the debt was $100,000. The taxpayer’s financial condition was pretty much the same for the whole year, and on 12/31/2017 he had $10,000 in assets and the only debt was the $100,000 loan that was then discharged. So before the discharge he was insolvent by $90,000 and after the discharge had a net worth of $10,000. In that situation, the taxpayer has $10,000 of discharged debt to include in income. For the $90,000 not included he may need to adjust other tax attributes to compensate for the exclusion. 


You’ll find more detailed explanations of the rules in IRS Publication 4681. Any other questions, of course, you can add to this thread. 

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