- A lender issues 1099-A when a borrower abandons a property.
- A financial institution issues a 1099-C when it forgives a debt.
- Canceled mortgage debt may not be taxable.
What is the difference between a 1099-A and 1099-C, and how will we know when our bank canceled our mortgage debt?
We had a piece of raw land (lot) in TX that was foreclosed on in 2009. We received a 1099A from the bank showing the bank taking a substantial loss (mortgage owed at time of foreclosure compared to FMV at time of foreclosure). We are personally liable for the debt as it is recourse debt. We have not received a 1099C. Our tax accountant is showing that we have no income to report in 2009 as we are still personally liable for the debt. I read on your site that TX has a 2 year statute of limitations on the debt collection. At what point does the debt that exceeded the value of the property become taxable to us? What must the bank send us to show that it is taxable once they relinquish their rights to sue (as long as 2 years from the foreclosure)?
A creditor is required to issue a 1099-A when a borrower abandons real or personal property. According to the IRS 1099-A instructions, "An abandonment occurs when the objective facts and circumstances indicate that the borrower intended to and has permanently discarded the property from use."
A 1099-A is not a notice of forgiveness. It is unclear to me what the purpose of a 1099-A is, other than to alert the IRS that at some point in the future the entity reporting the borrower's abandonment may issue a 1099-C.
If the financial institution issues a 1099-C to you, then it has forgiven the debt and you must report the amount on the 1099-C as income. Fortunately, the Mortgage Forgiveness Debt Relief Act allows taxpayers to exclude income from the discharge of debt on their principal residence. It includes the cancelation of the complete debt, or if the mortgage terms were renegotiated.
If the financial institution issues a 1099-C to you, it will probably not pursue you for the deficiency balance because it has deducted the loss on the loan from its taxes. However, there is no guarantee the financial institution will not pursue you for the deficiency balance and then later amend its tax returns. However, such a chain of events is unlikely.
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