Gary Bode, CPA: I hope this helps you understand Form 1099-A. For a free phone consult, please call 399-2705.
Form 1099-A CPAs field lots of cancelled debt questions, especially how Form 1099-A affects Form 982 and capital gains. Hi, I’m Gary Bode, a cancelled debt CPA with a virtual office to help you with your rental property foreclosure or short sale wherever you live. Unfortunately, Form 982 and cancelled debt became a sub-specialty for us during the recession. Sadly we’re still seeing Form 1099-A and Form 1099-C in 2013.
What is Cancelled Debt?
If your lender or credit card company “forgives” (writes off as uncollectable) some or all of your balance, that amount becomes cancelled debt. The lender reports cancelled debt to the client and IRS via Form 1099-A or Form 1099-C. Cancelled debt becomes taxable income. Sometimes you can exclude some cancelled debt from taxable income using Form 982. Form 1099-A doesn’t always mean the lender won’t still try to collect from you - please see below.
What is Capital Gain?
Form 1099-A reports cancelled debt from foreclosures and short sales of real estate. And it reports the Fair Market Value of the property, the key difference between it and Form 1099-C. Some folks forget about the sale of the property. Capital gain tax is different than income tax. Capital gain is the “profit” you make on the sale.
“Even though Form 1099-A implies a capital loss, you still have to report the sale to the IRS. With rental and investment property, cancelled debt changes the “tax attributes” of the property’s basis.”
- Gary Bode, Form 1099-A CPA and rental property tax accountant
If the property sells before Form 982 is prepared, use the actual sales price instead. You can amend a prior tax return if required.
When don’t you need a Form 1099-A CPA?
If Form 1099-A reports cancelled debt on your primary residence, the exclusion is automatic if you fill out a few lines of Form 982. An exception might a second mortgage or line of credit that wasn’t used to improve the property.
Can your Lender issue Form 1099-A and still pursue you for the Debt?
Yes, I see that happening. But the IRS takes the amount on Form 1099-A as Gospel. So the immediate tax consequences are the same.
Form 1099-A Flows into this Year’s Tax Return
Check that all Information is Correct
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-C, banks sometimes use December 31st by default. If you, or the business, wants to exclude Cancelled Debt from gross income, via Form 982, your insolvency calculates at the date provided. By December 31st, you may have made some financial progress, which could mean paying more tax. Ouch!
- Box 2: the amount of outstanding loan principle becomes Cancelled Debt. Cancelled Debt becomes taxable income on Form 1040, Schedule C, Schedule E, Form 8825, etc. Box 2 may not be definitive. Perhaps the bank won’t “forgive” the entire amount. You might have to amend your taxes later.
- Box 4: you’ve essentially sold your property, car or whatever for the Fair Market Value in Box 4. At least for IRS purposes. If you need to declare a Capital Gain or Capital Loss on the abandoned property, Box 4 becomes the sale price. But, the true FMV is what the bank’s auction brings and could be less than the FMV on Form 1099-A. So you might have to amend your taxes later.
- Form 982 calculates the dollar amount of cancelled debt exclusion. With rental property short sales and disclosures we generally use the insolvency components of Form 982.
- The exclusion shows up as a negative number on Form 1120-S, Form 1065 or Form 1040.
- Remember that Form 982 changes the tax attributes of the rental property by adjusting its basis.
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.
We’re a Cancelled Debt CPA firm that prepares Form 982 from Form 1099-A. Our virtual office allows us to serve clients outside our Wilmington NC geographical base. The CPA license is good in all States. Don’t let distance alone dissuade you from retaining us. 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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