In a previous blog, we described the benefits of the Short Sale v.s. the Foreclosure, and we left the decision up to you. But what if you have already passed the point of no return? What if you already have a foreclosure on your hands? How will you know what the IRS needs from you? What’s the difference between a 1099-A form and a 1099-C form? We want to help you be prepared for most anything, and the first step to preparation is having a full understanding of your situation.
In the event of a foreclosure, regardless of whether or not a debt is paid in full, the lender of a homeowner loan can file a 1099-A form. A 1099-A form can be filed if the creditor would have any reason to believe that the property has been abandoned.
The IRS states that abandonment occurs “when the objective facts and circumstances indicate that the borrower intended to and has permanently discarded the property from use.”
Aside from letting the IRS know that a borrower has abandoned a property, the 1099-A form also leaves the borrower liable for taxes on the abandoned property. But, luckily, in some cases, borrowers may be forgiven of their loans, or have their debts cancelled. Yes, cancelled!
According to the IRS, if the lender cancels a debt, in connection with an abandonment or foreclosure, within the same calendar year, they may file a 1099-C instead of a 1099-A.
After filing the 1099-C, despite the cancelled debt, the borrower must still list the cancelled remaining debt as income. Fortunately, the borrower may qualify for tax exemption under The Mortgage Forgiveness Debt Relief Act. We highly recommend that you speak to a financial consultant to see if the debt qualifies under the The Mortgage Forgiveness Debt Relief Act. You may avoid paying taxes on the cancelled debt after all!
If you have tips or knowledge, and want to share some of your experiences with foreclosures, you are welcome to post them in the comments!
Note: This article is not intended to give tax related information; we are just sharing with you what could happen if you foreclose your home. Please consult with a licensed tax adviser for further questions/concerns. All the information provided is deemed reliable but not guaranteed.