IRS Tax Form 1099-A CPA accountant discusses rental property foreclosures | Form 1099-A instructions | Landlord tax issues

I’m a Form 1099-A CPA tax accountant because two of my specialties are rental real estate and cancelled debt. Form 1099-A doesn’t report cancelled debt, but cancelled debt on Form 1099-C, Cancellation of Debt, often follows Form 1099-A. Rental property foreclosures from the Recession are still spilling into 2014. I’ll try to cover issues a landlord would want to read in the Form 1099-A instructions. The Form 1099-A instructions are for the issuing banks, not the taxpayer - go figure. I’ll present tips I’ve learned over the years about landlord tax issues and rental property foreclosures; plus answer some IRS Form 1099-A FAQs. Any Form 1099-A discussion has to include some mention of IRS Form 4797, Sales of Business Property. But this post doesn’t address 4797 in-depth.

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

IRS tax Form 1099-A isn’t just for rental real estate foreclosures. But I see it used most often in rental property foreclosures, deed in lieu of foreclosure and pure abandonments.

The left side of IRS Form 1099-A lists information for both the creditor and taxpayer. Why? The banks send a copy of Form 1099-A to the IRS. The revenue matching program of the IRS will look for the Form 1099-A on the landlord’s tax return.

You won’t find these two tips in the Form 1099-A instructions:

• Make sure you’re the correct recipient. Identity snafus occur.
• Review your Form 1099-A for accuracy. The IRS accepts Form 1099-A as accurate. You’re supposed to get the bank to issue a corrected Form 1099-A.

Box by box

• Form 1099-A, Box 1. This lists the date the rental property’s title transferred from the landlord to the bank. Sometimes that doesn’t reflect the true date.
  • The date can be a big deal if the lender eventually allows rental property cancelled debt and issues Form 1099-C. Why?
    • The insolvency exclusion of Form 982 uses the date of transfer.
    • In my experience as a Form 1099-A CPA, landlords are most insolvent when the title transferred. As opposed to, say, six months later.
    • The qualified business debt exclusion also uses the Form 1099-A date for Form 982, but is less sensitive than the insolvency exclusion.
• Form 1099-A, Box 2. This is the amount of rental real estate mortgagedue as of the date in Box 1.
  • The banks want this high. Why? It justifies their bad debt expense to the IRS.
  • It probably includes hidden fees. Check the amount in Box 2 against other mortgage principal documents.
• Form 1099-A Box 3. This seems to be reserved for future use. The Form 1099-A instructions don’t mention Box 3.
• Form 1099-A Box 4. This is the Fair Market Value of the foreclosed real estate, as of the date in Box 1.
  • The banks want this low, again because it justifies their bad debt expense.
  • But a low figure works well for the landlord as well as it increases a tax-deductible loss or decreases a taxable gain on the rental property “sale” for IRS tax Form 4797.
• Form 1099-A Box 5. If checked the landlord was personally responsible for the loan.
  • A mortgage loan you’re personally responsible for is a recourse mortgage loan.
  • If the mortgage loan is only secured by the rental property, and the not by the landlord personally, that’s a non-recourse loan.
  • These loan distinctions factor into some rental property cancelled debt issues.
  • I think Box 5 is why so many of my new rental property Clients think Form 1099-A generates cancelled debt. It doesn’t, read below.
• Form 1099-A, Box 6. Here’s a description of the property that generated Form 1099-A.

Common IRS Form 1099-A FAQs

“Receiving IRS Form 1099-A for a rental property foreclosure doesn’t generate cancelled debt income.”
- Gary Bode, IRS Form 1099-A CPA accountant

I think all Form 1099-A CPAs hear misconceptions from their rental real estate clients. Here’s a list, in no particular order.

• Form 1099-A doesn’t generate cancelled debt.
• Form 1099-A just reports a “sale” of the rental real estate to the IRS.
• The IRS considers rental property foreclosures to be sales. I know the foreclosure doesn’t seem like a sale to the landlord.
• Form 1099-A requires your rental property CPA to calculate the gain or loss from the “sale” on Form 4797, Sales of Business Property.
  • Even a cursory glance at the Form 4797 instructions may show the need for a rental property CPA experienced with Form 1099-A.
• Form 1099-A, Acquisition or Abandonment of Secured Property, may not arrive by January 31st, 2015 as other Form 1099(s) are required to.
• Sometimes Form 1099-A isn’t issued. If the lender cancels the remaining rental property mortgage quickly, a Form 1099-C, Cancellation of Debt, gets issued. This includes the information that would have been on the IRS Form 1099-A. Read about the potential tax trap this can become.

“If you receive a Form 1099-A for a rental property foreclosure, expect a future Form 1099-C. Just because you don’t receive your copy doesn’t mean the IRS didn’t receive theirs.”
- Gary Bode, Form 1099-A CPA accountant

A Form 1099-A rental property trap

You won’t find this in the Form 1099-A instructions either. Let’s say you’ve only received a Form 1099-A for a rental property foreclosure when you file your taxes in 2015. When your Form 1099-A CPA prepares Form 4797, Sales of Business Property, you’ll probably have a deductible loss on the “sale.” Happy happy. But if a 2015 Form 1099-C arrives, and your cancelled debt CPA can’t exclude it from taxable income using the qualified business debt and/or insolvency provisions of Form 982, you’ll have cancelled debt income without the rental property loss to offset it. Talk to your Form 1099-A about this potential tax trap.

Form 4797, Sales of Business Property

The calculation for gain or loss on the rental property foreclosure isn’t rocket science. But the Form 4797 instructions sure make it sound that way. Form 4797 covers a wide array of reportable transactions, making it hard to pick out what parts of the Form 4797 instructions apply to you. Another problem with Form 4797 is that contains issues covered by other IRS instructions. Ouch.

Here’s a tip. Form 1099-A CPAs usually don’t use the Form 1099-A instructions or the Form 4797 instructions. Why, we use specialized tax databases which are so much easier to use. Try to find access to one, perhaps from a University library.

Do you need a Form 1099-A CPA for a rental property foreclosure?

Maybe not. But Form 4797 is complex. There are issues on the final Form 8825 or Schedule E as well. If you don’t have a local Form 1099-A CPA, consider calling me for a free rental property consult at (910) 399-2705.

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