1099

From CaseyPedia

Form 1099 is a United States Income Tax form required by the IRS when a taxpayer is required to report income other than conventional wages and salaries. In particular, Form 1099-C is used to report the cancellation of any type of debt. Regarding the tax form as it relates to foreclosure, an online article states^[1]:

A foreclosure on a home may also result in a 1099-C from the mortgage lender if the property is sold for less than the amount of the loan. In this instance, a person loses their home and may also face a tax bill. Usually, the bill comes many months after the tax return was filed as a result of an IRS document matching program. This "under-reporter" notice brings grief to the taxpayer.

The key issue is whether or not the debtor was insolvent. If they were insolvent, it may not be taxable depending on the circumstances. There is an "Insolvency exclusion." You are insolvent when, and to the extent, your liabilities exceed the fair market value of your assets. So it is possible none of your forgiven debt is taxable or it is possible that all or only a portion of it is counted as income.

You may not have any taxable income from the 1099-C, but you must account for it on your return. The issue is whether or not you were solvent at the time of the debt cancellation. You only owe tax on the forgiven debt to the extent you were solvent. For instance, if the forgiven debt was $10,000 but you are only worth $5,000; you would only be liable for income tax on that amount. A home foreclosure is complicated and you may have other legal arguments besides insolvency.

There are five situations where a cancelled debt does not have to be reported as income:

Bankruptcy – the debt was already discharged through a bankruptcy proceeding.

Insolvency – your total debts exceed your total assets at the time your debt was settled or deemed non-collectable.

Indebtedness is due to a qualified farm expense.

Indebtedness is due to certain real property business losses.

Discharge of your debt was treated as a gift (You owed Mom $10K and she said "Don't worry honey, consider it a gift").

Do not ignore a 1099-C! Failure to address the 1099C will result in a tax assessment by the IRS for any amount over $600 plus penalty and interest. This will likely occur 12-18 months after you file when IRS matches up the info reported to them with what is on your tax return. Have a tax professional do your return and they can help you determine how much of the 1099-C is taxable.