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Form 1099-A CPA Accountant explains Cancelled Debt and Gain or Loss for Rental Property | Foreclosure | Short Sale | tax Form 982 | discharge of qualified real property business indebtedness

Form 1099-A CPA discusees Form 982 and rental property short sales

Form 1099-A is Round 1, the “sale” of your rental property. Round 2 is 1099-C where cancelled debt becomes taxable income. Sometimes clients win by a TKO using Form 982 to exclude Cancellation of Debt from taxable income. Form 1099-A can be a huge tax advantage if the debt is not cancelled yet. Need a free consult. (910) 399-2705.

Form 1099-A CPA accountants field lots of rental property cancelled debt questions, especially on how Form 1099-A affects the gain/loss on the rental property. Hi, I’m Gary Bode, a debt cancellation CPA with a virtual office to help you with your rental property foreclosure or short sale, wherever you live. Unfortunately, I’m still seeing rental real estate foreclosure cancelled debt in 2017. Plus, surprisingly, I speak regularly with Folks expecting a 2018 Form 1099-A, or Form 1099-C. Mortgage company Folks predict the 2017 tax season will see an increased number of rental property foreclosures, not because of the economy today, but because of the inherent delays with rental property foreclosure. I’m covering more than just the rental property Form 1099-A, Acquisition or Abandonment of Secured Property, because that’s usually just part of the process. Please note the Form 1099-A instructions are for the bank.

Typical Progression of tax reporting starting with Form 1099-A, Acquisition or Abandonment of Secured Property, rental property foreclosure, short sale, etc.

  • The Landlord has a rough year.
  • Four common scenarios:
    • The bank forecloses on the rental real estate property.
    • The Landlord short sells the rental property.
    • The Landlord just abandons it.
    • The bank allows deed in lieu of foreclosure.
  • The bank issues Form 1099-A, Acquisition or Abandonment of Secured Property.
    • Note we sometimes challenge that date with the IRS, if possible and it benefits the landlord by lowering the tax due or increases the loss.
  • The Landlord reports the last year of rental property income and expense using:
    • Schedule E, Supplemental Income and Loss.
      • Supplement the Schedule E instructions with the Form 8825 instructions (8825 is just a corporate version of Schedule E)
    • Or IRS tax Form 8825, Rental Real Estate Income and Expenses of a Partnership or an S Corporation.
    • Form 8582, Passive Activity Loss Limitations, shows the landlord’s prior disallowed losses, if any.
      • The landlord can deduct this on Schedule E in the year of disposition.
      • That’s part of why I always ask for a few back tax returns.
      • The Form 8582 instructions are difficult to read.
      • Prior disallowed losses accumulate over multiple years.
        • So sometimes they don’t get carried forward if you change tax software or Form 1099-A CPAs.
  • The Landlord calculates the gain on the “sale” of the rental property using Form 4797, Sales of Business Property.
    • Excess loss in 2017 can be carried back or carried forward to offset income in other tax years.
    • You might have to amend an earlier tax return.
    • Sometimes you can just file Form 1045, Application for Tentative Refund.
      • Form 1045 isn’t for amateurs, look at the Form 8582 instructions.
    • I’ve seen some tax software prepared back rental property tax returns with this tax calculation amazingly wrong. Reasons include the IRS, Congress, the tax software and the tax preparer.
      • I always calculate the gain or loss manually because the IRS approaches it in a way counter intuitive, to me at least.
    • The Form 4797 instructions won’t help you much.
    • Try going to your local bookstore and pick up a current annual tax book. They’re written in English, not like highly stylized technical writing typical in IRS instructions.
  • If the bank forgives part of the outstanding mortgage balance, they issue Form 1099-C, Cancellation of Debt. This can occur in a future tax year.
  • Sometimes the bank forgoes Form 1099-A if debt cancellation on the rental property is simultaneous with the title transfer. They may just issue Form 1099-C.
    • IRS Form 1099-C for rental property foreclosures and short sales triggers the same “sale” as the Form 1099-A.
    • Form 1099-C  just combines cancelled debt and “sale” information.
  • Box 2 of Form 1099-C, Cancellation of Debt, becomes taxable income unless it can be excluded on Form 982.
    • I sometimes use two Form 982 exclusions:
    • Discharge of qualified real property business indebtedness.
    • Insolvency.
  • Any non excludable cancelled debt becomes taxable income.
  • The reduction of tax attributes section of  Form 982 may cause tax consequences in future tax years.
    • Read IRS Publication 4681 to understand the reduction of tax attributes tax reporting requirements.

What is IRS Form 1099-A, Acquisition or Abandonment of Secured Property?

  • The IRS mandates the bank to issue tax Form 1099-A under certain circumstances.
  • IRS tax Form 1099-A means you’ve lost ownership of an asset to a lender.
  • Form 1099-A doesn’t mean there is debt cancellation.
  • Form 1099-A doesn’t always mean the lender won’t still try to collect from you – please see below.
  • The amount listed on Form 1099-A isn’t cancelled debt, yet. It just reports the transfer of property e.g. rental property, repossessed cars, foreclosures etc., to the IRS.
  • This means you might have to report the “sale” of that property, usually using the numbers on Form 1099-A. The IRS thinks this information is gospel, and you have to prove otherwise.
    • Note the date and Fair Market Value on Form 1099-A are the most disputed issues.
  • The three main figures on tax form 1099-A are the amount of mortgage loan balance owed, the date the property transferred to the bank and the Fair Market Value of the rental property as of the date on Form 1099-A.

Box 4 of IRS Form 1099-A, Acquisition or Abandonment of Secured Property

Box 4 of Form 1099-A show a Fair Market Value of the rental property at the time of foreclosure or short sale. The FMV in Box 4 is a soft number. Who knows what it’s worth until it’s sold? Sometimes I’ll build a case for a better number if that works to my Client’s advantage. A lower FMV means more loss on the rental property or less gain on the “sale” of the rental property; both possibilities work in the landlord’s favor, especially if there’s no cancelled debt yet. The IRS adds a few wrinkles to the calculation as well.

“Since there’s no debt cancellation on tax Form 1099-A, it doesn’t trigger use of Form 982. But Form 1099-A sometimes means a Form 1099-C is in your future. Don’t pay additional tax on debt cancellation reported on Form 1099-C until you’ve worked every angle of tax Form 982.”
– Gary Bode, CPA accountant and Form 982 specialist

What is Cancelled Debt?

Tax Form 1099-A,  Acquisition or Abandonment of Secured Property is just Round 1. If your mortgage lender “forgives” (writes off as uncollectable) some or all of your loan balance, that amount becomes cancelled debt. The lender reports cancelled debt to the client and IRS via Form 1099-C, Cancellation of Debt. Cancelled debt becomes taxable income. Sometimes you can exclude cancelled debt from taxable income using Form 982, Reduction of Tax Attributes.

What about the Gain or Loss from Form 1099-A, Acquisition or Abandonment of Secured Property?

Form 1099-A triggers a reportable “sales” transaction that’s reportable to the IRS. Like a rental property foreclosure or short sale. You may have a reportable “sale” for IRS purposes. So let’s look at a short sale of a rental property as reported on Form 1099-A. Here’s the calculation components:

  • Purchase Price of the rental property.
    • Sometimes the landlord didn’t include all the expenses so we look at the purchase HUD.
    • Using the buyer’s settlement costs alone can save $1,000 +/- of taxes due.
  • Improvements.
    • Usually any rental real estate improvements are depreciated separately.
    • But they factor into the rental property foreclosure calculation.
      • Sometimes they just increase the purchase price depending on the timing.
  • Past depreciation; a huge big deal.
    • The landlord has to recapture depreciation, to the landlord’s detriment, even if none was claimed on earlier tax returns.
    • Sometimes your Form 1099-A CPA can get the IRS to allow all non claimed depreciation in the year of sale. Timing is tricky here.
    • I’m talking about Form 3115. Read the Form 3115 instructions to see why Form 1099-A CPAs dislike this form. I mean really dislike it. But it works.
  • Current depreciation from Schedule E, Supplemental Income and Loss, or, Form 8825, Rental Real Estate Income and Expenses of a Partnership or an S Corporation.
  • Prior disallowed rental property losses.
    • You can see those on Form 8285, Passive Activity Loss Limitations, on the last tax return. AKA prior disallowed losses.
      • The Form 8285 instructions won’t help.
        • List your properties by name or address. Otherwise your 1099-A CPA has to calculate how much of the prior disallowed loss can be claimed on the 2016 tax return.
        • That’s expensive and not a fun project.
    • There can be a huge amount of prior disallowed losses you can claim in the rental property’s year of sale.
    • Sometimes six figures.
    • I amend landlord tax returns that didn’t deduct the Form 8582 amount on the final Schedule E.
  • Actual or imputed sales price.
    • Form 1099-A includes an estimate of the Fair Market Value of the rental property as of the date of the 1099-A.
    • This is usually high, so the bank can write more bad debt expense on its own tax return.
    • Often it’s sold at a Sheriff’s auction for considerable less.
      • Less is better because it generates more deductible loss for the landlord or less capital gain.
  • Selling expenses.
    • Anyone who’s ever looked at a HUD statement knows there can be thousands of dollars in seller’s settlement costs.
    • Including the these settlement charges often saves another $1,000 of tax due.

Excess losses can be carried back or carried forward to offset income in other tax returns.

“Even though Form 1099-A implies loss, you still have to report the sale to the IRS. With rental real estate, the loss is ordinary, meaning you can use it to offset other income now or in the future.”
– Gary Bode, Form 1099-A CPA accountant

If the property sells before you file your tax return, use the actual sales price instead. You can amend a prior tax return if required.

Can your Lender issue Form 1099-A and still pursue you for the Debt?

Yes, unless they agree to cancel the remaining mortgage debt. If and when the bank forgives any debt they’ll issue a Form 1099-C. This can be years later and often comes as a surprise to the Client. Note the IRS expects you to report cancelled debt in the year it occurred even if no Form 1099-C got issued. So that means you have to infer Form 1099-C and then adjust that when the Form 1099-C arrives. Amending a past return is common in rental real estate cancelled debt.

Hint: if you receive a Form 1099-A, expect a 1099-C eventually. Banks get a bad debt reduction when they decide to write off the debt and Form 1099-C justifies that deduction to the IRS.

Form 1099-A  Flows into your 2016  Year’s Tax Return

Check that all Information is Correct on 1099-A

Again, consulting your own Form 1099-A CPA is prudent.

  • Box 1: the date.
    • Be sure this is correct, since, at least on Form 1099-A, banks sometimes use December 31st by default.
    • We challenge the date if there is documentation to justify an earlier date, and, that earlier date works better for the landlord.
  • Box 2: Box 2 may not be definitive.
    • Remember the bank uses this figure to prove its own bad debt expense to the IRS. So a high figure works in their favor.
  • Box 4: If you need to declare a gain or loss on the abandoned property, the imputed sales price comes from one of several figures. Box 4 is one of these. But, the true FMV may be what the bank’s auction brings and could be less than the FMV on Form 1099-A. Form 1099-C has another wrinkle on the imputed sales price as well.
    • The sales price of the next sale of the property is public record.

Disclaimer: no posting on this website is conclusive for your particular circumstances, regardless of how well researched and written it is. Cancelled debt, Form-1099-A, Form 1099-C, Form 982, foreclosures and short sales are all complex. Obtaining a professional opinion is prudent. The discharge of qualified real property business indebtedness and insolvency exclusions of Form 982 aren’t straightforward. Form 4797, Sales of Business Property, covers lots of situations and it’s easy to get lost.

We’re a Cancelled Debt CPA firm that prepares rental property foreclosures and cancelled debt tax returns. Our virtual office allows us to serve you wherever you live and wherever the rental property is/was. We have hundreds of postings on this site, many dealing with Form 982, Form 1099-C, Cancelled Debt, insolvency, short sales, foreclosures, etc. If you need a free phone consult, give us a call at (910) 399-2705.

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