1099-A - Foreclosure Rental Property

[Gloria]

Client received a 1099-A for rental property that was foreclosed. Would the transaction result in an entry on Form 4797 and an entry on line 1040 line 21 as listed bellow? I am not sure if part of the entry is reported on Line 21 of the 1040 or elsewhere. Thanks in advance for your input.

1099-A RENTAL PROPERTY

$212,164.40 Box 2 - Balance of Principal Outstanding

$168,300.00 Box 4 -Fair Market Value of Property

$222,621.00 Adjusted Basis of Property

$212,164.40 Amount from Box 2

($222,621.00) Adjusted Basis of Property

($10,456.60) Loss Form 4797--Sales of Business Property

$212,164.40 Amount from Box 2

($168,300.00) Amount from Box 4

$43,864.40 Ordinary Income -- Other Income Line 21-1040

[frazzled]

there is not any income to include on line 21 until the debt has been cancelled (1099-C). With a 1099-a you just report the sale and advise the client that a 1099-c might come in another tax year. I think the financial institution has 3 yrs to make that cancellation of debt determination.

[Gloria]

there is not any income to include on line 21 until the debt has been cancelled (1099-C). With a 1099-a you just report the sale and advise the client that a 1099-c might come in another tax year. I think the financial institution has 3 yrs to make that cancellation of debt determination.

Thank you Frazzled but I do not think a 1099-c is issued after a 1099-a (acquisition or abandonment of secured property)is issued. I think I found the answer--I enter the ordinary income on line 3 of the Schedule E.

[TAXBILLY]

>>Thank you Frazzled but I do not think a 1099-c is issued after a 1099-a (acquisition or abandonment of secured property)is issued. I think I found the answer--I enter the ordinary income on line 3 of the Schedule E.<<

I am curious as to where you found this answer.

taxbilly

[Gloria]

>>Thank you Frazzled but I do not think a 1099-c is issued after a 1099-a (acquisition or abandonment of secured property)is issued. I think I found the answer--I enter the ordinary income on line 3 of the Schedule E.<<

I am curious as to where you found this answer.

taxbilly

Taxbilly,

Following is the information:

From Publication 544 - Sales and Other Dispositions of Assets

Forms 1099-A and 1099-C. If your abandoned property secures a loan and the lender knows the property has been abandoned, the lender should send you Form 1099-A showing information you need to figure your loss from the abandonment. However, if your debt is canceled and the lender must file Form 1099-C, the lender may include the information about the abandonment on that form instead of on Form 1099-A (I am assuming that if the information is already included in the 1099-A a 1099-C may not be issued)

Regarding where to record the ordinary income: Publication 4681 - canceled debts: Chapter 1, Page 3.

Schedule E (Form 1040), line 3, if the debt is related to a nonfarm rental activity

[Tax Prep by Deb]

Don't assume anything. I have seen situations where a 1099-C was issued and not a 1099-A and that is what the instructions you were referring to indicated, however I have not seen a situation where the client was liable for the debt (Recourse Loan) that received only the 1099A. I do believe that until you see the 1099-C you do not include anything in income. Only report the transaction as a sale at this point.

Again, I could be wrong, but I've seen a lot of these and the only ones I didn't see a 1099-c on was when the client had a non-recorse loan.

Deb!

[Gloria]

Don't assume anything. I have seen situations where a 1099-C was issued and not a 1099-A and that is what the instructions you were referring to indicated, however I have not seen a situation where the client was liable for the debt (Recourse Loan) that received only the 1099A. I do believe that until you see the 1099-C you do not include anything in income. Only report the transaction as a sale at this point.

Again, I could be wrong, but I've seen a lot of these and the only ones I didn't see a 1099-c on was when the client had a non-recorse loan.

Deb!

Thanks Deb, I need more reassurance,

I am working on the returns for 2008 & 2009 for T/P. T/P received the 1099-A for a property that foreclosed on June 12, 2008 (American Home Mortgage Servicing) for a recourse loan. For the year 2009, T/P has five 1099-C's for loans that Wachovia agreed to reduce at her persistence. All properties are rental properties and the loans are recourse loans. Client had 14 properties. Four properties foreclosed in 2008 (I have not seen the balance of the information for 2008 for the other foreclosures as she accidentally left a folder behind at her home). T/P is working with other banks to reduce the loans on 4 or 5 more properties.

The Instructions to Borrower on the back of 1099-A for box 4 states: Box 4: Shows the fair market value of the property. If the amount in box 4 is less than the amount in box 2, and your debt is canceled, you may have cancellation of debt income. If the property was your main home, see Pub 523, Selling your home to figure any taxable gain or ordinary income.

I am concerned that if I do not report the ordinary income (especially if she only has 1099-A's for the other 3 properties as well) that she may have problems when the IRS does their matching in the future. T/P would be much better off if the ordinary income is not included. This is my first return involving foreclosures and cancellations of debt for recourse loans. If I report the sale only, she will have a loss. If I report the ordinary income as well she will have a gain. SO IF YOU CAN, PLEASE REASSURE ME ONE MORE TIME, THAT I CAN LEAVE THE ORDINARY INCOME OUT UNTIL T/P RECEIVES A 1099-C. THANKS.

[Gloria]

I found another article --this leads me to assume that Form 1099-A is also used to report cancelled debt--see last sentence.

FROM IRS WEB PAGE

Topic 160 - Form 1099-A (Acquisition or Abandonment of Secured Property) and Form 1099-C (Cancellation of Debt)

If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the canceled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven or the property is abandoned or foreclosed, the amount you received as loan proceeds is reportable as income. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-A, Acquisition or Abandonment of Secured Property, or Form 1099-C, Cancellation of Debt.

[Tax Prep by Deb]

I understand your concern, but here is the problem. Let's say you receive a 1099-A and report it based on what's on that form, then the lender sells the property (perhaps after holding unto it for a time) and the price goes up thus reducing the amount of cancelled debt? The whole idea behind the two forms is one simply puts IRS on notice that a change in the property has taken place, thus the need to report the sale, however the actual amount of cancelled debt cannot be determined until the bank or whoever holds the loan actually sells the property. Let's say they report that the balance on the loan at time of the abandonment or foreclosure is 100,000.00 and the FMV of the property is 50,000.00. One would assume under this scenerio that the COD income would be 50,000.000. However lets say the bank holds unto the property and does not immediately forgive the debt, then when they go to sell it lord and behold the value has gone up to 75,000.00. Now you only have 25,000.00 of COD income to report.

So again, I think you need to find out if possible if the property has been resold, the lender needs to give something indicating the actual amount of debt forgiven. Here in California we are seeing the banks holding unto the property for at least a year. I had one client who in 2008 declared bankrupcy and had the home included in the charge offs. The bankrupcy was completed in 2008, however in 2009 they received a 1099-C after earlier receiving a 1099-A. So just because your client hasn't received it yet does not mean they won't. If there are any doubts, have your client contact the mortgage holder and ask.

Deb!

[jainen]

>> if your debt is canceled and the lender must file Form 1099-C, the lender may include the information about the abandonment on that form instead of on Form 1099-A (I am assuming that if the information is already included in the 1099-A a 1099-C may not be issued)<<

It seems to me that your assumption is the opposite of what your quotation says. As I read Pub 544, the lender is always required to issue a 1099-C when debt is canceled. They can issue a separate 1099-A (if, for example, it is at a different time) or include both the foreclosure and the cancellation of debt on the 1099-C. Apparently your client's debt was not cancelled at the time of foreclosure, because he didn't get the required 1099-C. This is very common with rental property, which normally have recourse loans. In my opinion your client must recognize gain or loss on the foreclosure in 2009, but he is still obligated to pay the rest of his debt.

[Tax Prep by Deb]

I agree totally with what you are saying. So the sale is reported, however there is no COD at this time, that comes when or if the lender agrees to forgive the remainder, or sales the property and forgives the remainder, then you will receive a 1099C and you will handled the COD at that time. Is that correct Jainen?

Deb!