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Form 1099-A CPA discusses a Rental Real Estate Cancelled Debt case | Form 1099-A, Acquisition or Abandonment of Secured Property, leads to $250,000 NOL

IRS Form 1099-C Form 1099-C CPA, Cancellation of Debt

Here’s a bad example of IRS Form 1099-A tax preparation for rental property. Need a free consult about a Form 1099-A? (910) 399-2705.

Sometimes a Form 1099-A CPA amends a past cancelled debt tax return. I hear lots of confusion about Form 1099-A, Acquisition or Abandonment of Secured Property. So I’ll present an example of bad tax preparation involving Form 1099-A.

Moral of the story? Form 1099-A by itself doesn’t generate rental property cancelled debt. It just shows the rental property changed hands; it provides the date, the amount of remaining rental property mortgage and a Fair Market Value of the rental property (as of the date on the Form 1099-C). It also reveals the perils of not filing tax returns in a timely matter. Plus I’ll touch on other aspects rental real estate foreclosures and short sales.

I’m not implying I don’t make mistakes, but this particular 2015 Form 1099-A case demonstrates how bad things can go with a rental property.

Case Overview

A new Client of mine was a back tax case from a non CPA tax preparer. They prepared 2007 and 2008 back tax returns using IRS transcripts. The Client was sort of asking for a second opinion on his back tax returns. The IRS had him in on an Installment Agreement (Form 9465) for about $2,000 a month. Yikes. He sent me copies of those back returns and the IRS transcripts.

  • He had four Form 1099-A, Acquisition or Abandonment of Secured Property, all involved rental real estate foreclosures.
    • One Form 1099-A was listed in both the 2007 and 2008 IRS transcripts, an IRS error.
    • An IRS error on a tax transcript is unusual.
  • The tax preparer treated the principal outstanding loan principal amount in Box 2 of Form 1099-A as cancelled debt.
    • Neither return included Form 982, the only way to exclude rental property cancelled debt from becoming taxable income.
  • The tax returns reported the same Form 1099-A, Acquisition or Abandonment of Secured Property, in both tax years.
  • The 2007 and 2008 showed over $500,000 of erroneous cancelled debt income.
    • So maybe $125,000 or so of false taxes due.
  • The rental income got reported on Schedule C instead of Schedule E.
    • That triggered erroneous self-employment taxes.
  • The “sale” of the rental properties used the Fair Market Value in Box 4 of Form 1099-A, as the cost basis on Form 4797, Sales of Business Property.
    • This misrepresented the loss.
  • There was over $250,000 of ordinary losses he could deduct in past and future tax years. The prior tax preparer never listed them or informed the Client.
    • This Client lost some options on this $250,000+ because he filed late.

“Form 1099-A, Acquisition or Abandonment of Secured Property, doesn’t trigger cancelled debt taxable income on Line 21 of Form 1040.” 
Gary Bode, Form 1099-A and rental property CPA

Cancelled Debt and Form 1099-A errors on the above tax case

  • No taxable cancelled debt income results from rental property foreclosures, short sales, etc., unless the lender issues a Form 1099-C, Cancellation of Debt.
    • But Form 1099-A triggers taxable gain/loss from the disposition of the rental property.
  • The bank can still try to collect the debt after issuing Form 1099-A, Acquisition or Abandonment of Secured Property.
  • Form 1099-A triggers a reportable sale of the rental property.
    • Use Form 4797, Sales of Business Property, to report the gain or loss.
  • You only report a Form 1099-A or Form 1099-C once, even if the IRS lists it in multiple tax years.
    • But sometimes the same Form 1099-C gets issued to multiple taxpayers. Like when friends buy rental real estate property together that later gets foreclosed or short sold.
      • All those folks are responsible for the full amount of Form 1099-C.
      • If one friend pays his fair share, the IRS can still hold him responsible for the rest of the rental property cancelled debt if the other friends refuse to comply with the tax reporting rules. Ouch.
  • Only Form 1099-C, Cancellation of Debt, triggers taxable income on Line 21 of Form 1040.
    • Cancelled debt in Box 2 of Form 1099-C becomes taxable income unless you can exclude on Form 982, Reduction of Tax Attributes.
    • The banks use Form 1099-C to justify their bad debt expense on their own tax returns and financial statements.
    • So, if you received a Form 1099-A, you’re almost assured receiving a Form 1099-C, perhaps years in the future.
    • Lots of Folks move between the issuance of Form 1099-A and Form 1099-C. So they never receive Form 1099-C because of a bad address.
  • You can use excess losses on Form 4797 for past and future tax returns.

“File your rental property tax returns on time. You lose some opportunities to optimize the ordinary loss incurred from the rental property’s foreclosure or short sale.”
– Gary Bode, cancelled debt CPA

Net Operating Loss (NOL) carryback and carry forward

Rental property foreclosures and short sales often generate more loss than the taxpayer can use in the current tax year. Subject to multiple levels of IRS regulations, these excess losses can be carried back or forward to offset taxable income in other tax years.

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