Did you receive a 1099 from your mortgage company on a home you surrendered?

This time of year always prompts many calls regarding a 1099 received from client’s mortgage companies after the property has been foreclosed.

The reason that clientsIRSbankruptcy receive this form is because the lender has acquired the property through foreclosure.  Form 1099-A is used to report to the IRS the acquisition of secured (i.e., mortgaged) property by a mortgage lender through foreclosure or other abandonment. The transfer of the property is considered a sale of the property to the mortgage lender for the amount of the debt.

In a foreclosure there are usually two steps, the abandonment of the property and then the mortgage lender sale. Usually, the abandonment of a personal residence does not have an immediate tax implication and there is nothing to report on your tax return for the year of the abandonment.

There would only be a tax impact if the loan was without recourse against the borrower or if it was business or investment property. Most mortgages are written with the personal guarantee of the borrower so the abandonment does not result in income.

When the property is sold, the mortgage lender may attempt to collect the shortfall in the mortgage loan from the borrower. If the lender cannot collect the debt, it will cancel it and issue a 1099-C to the borrower.

In most cases, if the property involved was the borrower’s personal residence, there will be no tax impact as a result of the cancellation of the debt.

For additional information you can go to the IRS site on this issue:

http://www.irs.gov/uac/Home-Foreclosure-and-Debt-Cancellation

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