20 Mar 1099-A, 1099-C and Foreclosure: Some Answers
Ah, once again we arrive at tax season. I know this because my office is right next door to a very large accounting firm, and I know it’s tax season when I come in on a Saturday morning and their parking lot is full. This year I’m sure we have something in common, foreclosed property and how to deal with it. But, I am sure that we are not the only ones working hard in this wave of foreclosures in Southwest Florida. I bet the phones of mortgage companies and mortgage servicers are ringing off the hooks with distressed homeowners who were foreclosed upon and now have received the dreaded 1099-A or 1099-C. Now the boring stuff. The IRS treats the cancellation of debt or forgiveness of debt as income to the individual or debtor. Therefore, businesses that either cancel or forgive the debt must send out 1099-A or 1099-C forms to the individuals or debtors. Usually, what happens after a foreclosure is that the house is sold for less than the balance owed on the note, thereby creating a deficiency. (Not really, the greedy mortgage company was probably paid tens of thousands of dollars in interest) This deficiency has to be resolved in some way. For the accountants and the lawyers who read this blog, H.R. 3648, the Mortgage Forgiveness Debt Relief Act of 2007 will aid some of these distressed homeowners. This law created a two (2) million dollar exclusion for couples whose homes (qualified principal residence) were foreclosed upon. This law applies for taxable years 2007 – 2009. The debtor needs to use Form 982, which can be accessed on the IRS website. If you believe that you are eligible for this type of relief, please see your tax professional.
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