Posted by Tucker Accounting Services LLC

How Does Abandonment or Acquisition of Secured Property Affect My Income Tax?

How Does Abandonment or Acquisition of Secured Property Affect My Income Tax?

If a creditor acquires your property through foreclosure and evicts you, or if you surrender your property before the eviction, the lender will send you an IRS Form 1099-A Acquisition or Abandonment of Secured Property or 1099-C Cancellation of Debt the IRS debt. These forms provide the needed information to report a gain or loss on a mortgaged property on federal income tax returns.


Foreclosures and Taxes

When a lender forecloses your property, the IRS treats the mortgage the same way you would sell your home. Your lender will send you a Form 1099-A if you've foreclosed on the property in a year but haven't paid off your mortgage until the following year. If the lender has foreclosed on your property and canceled your mortgage debt in the same year, all you need to do is submit a Form 1099-C Debt Cancellation Form.


Types of loans

A recourse loan is a loan for which the lender is personally responsible for the loan and can legally process it for the outstanding balance. You must report the forgiven debt resulting from the foreclosure as federal tax revenue. You may also be required to report a capital gain or capital loss resulting from the execution. A non-recourse loan is a loan for which you are not personally responsible, and the lender cannot legally claim your loan balance. You must report a gain or loss while running on federal income tax returns. There is no need to report the canceled debt as income for a non-recourse loan. You should check your state's laws to determine whether you live in a recourse state or not.


Periodic income reporting

If you are in dispute, the amount of income you report due to foreclosure is the outstanding credit balance minus the proceeds from the foreclosure sale. Report this as regular income, and the IRS will tax the money equally. You can also decide to report the fair market value (FMV) of your home as income. In this case, you would be using the property's fair market value when the property was transferred to the lender and not the fair market value when the property was purchased. Revenues from canceled debt only apply to recourse loans.


Capital gains and losses

To adjudge if you have a gain or a loss from foreclosure, you need to know the balance owed at the time of foreclosure and the property's fair market value. You can find these values on Form 1099-A. You also need to calculate your adjusted basis. The adjusted basis is the loan amount less the cost of any improvement, depreciation, or damage to the property that affects its value. To calculate the profit, subtract the adjusted basis from the amount of canceled debts, usually called the realized value. To calculate a loss, subtract the amount of your written-off debts from the adjusted basis.


How to file Form 1099-A

You will use the information from Form 1099-A to report the execution of your tax return. Please note that if the foreclosure includes forgiveness of debt, you will also receive Form 1099-C.

Here is a summary of Form 1099-A. The form's left side provides details about the creditor and the debtor, including the debtor's name, addresses, tax identification numbers, and account number. The right part of the form has six boxes:

  • Box 1: date of acquisition or knowledge of abandonment by the creditor: This box shows how the creditor acquired the asset or the date on which the creditor first learned that the asset had been abandoned.

  • Box 2: Balance of principal outstanding: This box shows the loan balance (principal only) when the lender bought the property or first learned that it had been abandoned.

  • Box 3: reserved: It is usually left blank. You do not have to fill anything in this box.

  • Box 4: Fair market value (FMV) of the property: Box 4 shows the property's fair market value. If the value in Box 4 is less than the value in Box 2 and your debt is paid, the debt receipts may be canceled. If that be the case, you should also receive Form 1099-C.

  • Box 5: Check if the borrower was responsible for paying the debt: Box 5 shows whether you were responsible for the debt when it was created or if it was changed when the most recent change was made.

  • Box 6: Description of the asset: Box 6 indicates the address of the property. If this does not adequately describe the property, the lender will enter the section, lot, and property block.

There are three copies of the 1099-A. The lender files Copy A with the IRS sends, you Copy B, and keeps Copy C. If your home is repossessed, the bank or lender should send you a copy of Form 1099-A. You should receive Form 1099-A by mail. If you haven't received a 1099-A and think you should receive it, contact your bank or lending institution.


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