IRS tax Form 1099-A CPA tax accountant discusses rental property foreclosures | landlord taxes | Schedule E and Form 8825

As a rental property CPA I’m getting calls in 2014 from landlords expecting rental property foreclosures. IRS tax Form 1099-A, Acquisition or Abandonment of Secured Property, seems to cause confusion and sometimes mistakenly invokes discussion of rental real estate cancelled debt. The Form 1099-A instructions are for the banks, not the landlord. So I’ll cover common Form 1099-A issues and how cancelled debt might factor into a rental property foreclosure, abandonment, deed in lieu of foreclosure, etc.

Common steps in rental property foreclosures

• The landlord no longer makes the rental property mortgage payments.
  • Or, the landlord simply abandons the rental real estate property.
• The bank forecloses on the rental property.
• The bank issues IRS Form 1099-A, Acquisition or Abandonment of Secured Property, to the landlord and the IRS. Usually in January.
• Form 1099-A informs the IRS that a taxable rental property “sale” occurred in 2014. I know it doesn’t seem like a sale sometimes. Form 1099-A includes:
  • The approximate date of rental property title transfer.
  • Outstanding mortgage balance of the on the rental property.
  • Description of the rental property.
  • The Fair Market Value of the rental property.
• The landlord calculates the gain or loss on the rental property foreclosure “sale” and includes Form 4797, Sales of Business Property, with their personal tax return, or, the S Corporation’s Form 1120S, the C Corporation’s Form 1120 or the Partnership’s Form 1065.
• Sometimes, later, the bank may forgive the some or all of the rental property mortgage leading to issuance of Form 1099-C, Cancellation of Debt.
  • Rental real estate debt cancellation is taxable income unless you can exclude it through Form 982, Reduction of Tax Attributes.
  • If debt cancellation occurs shortly after the rental property foreclosure, the bank may skip issuing Form 1099-A and just send a Form 1099-C, Cancellation of Debt.

“I’ve seen tax returns that automatically classify the remaining mortgage principal in Box 2 of Form 1099-A as cancelled debt income. Form 1099-A, Acquisition or Abandonment of Secured Property, doesn’t incur any rental property cancelled debt for the landlord.”
- Gary Bode, IRS Form 1099-A CPA tax accountant

Reporting the rental real estate property “sale” to the IRS

The landlord includes Form 4797, Sales of Business Property, with the 2014 tax return. I think Form 4797 is a snake pit because it covers so many situations besides rental property foreclosures. The Form 4797 instructions aren’t much help, in my opinion. The factors affecting the rental property gain or loss figure on Form 4797 include:

• Applicable selling price of the rental property (that got foreclosed). That’s not always straight forward.
• The amount of current and prior rental property depreciation claimed on past tax returns.
• The original cost of the rental property. You want the cost to be high. I see cases where only the HUD statement purchase number got used.
• Basis adjustment if IRS tax Form 1099-C gets issued and cancelled debt is excluded from taxable income on Form 982, Reduction of tax Attributes.

“I see tax return that understate the deductible rental property foreclosure loss. No CPA likes to see a legitimate tax deduction wasted.”

Common rental property issues in the year of foreclosure

• The final year’s Schedule E (Form 1040), Supplemental Income and Loss, or Form 8825, Rental Real Estate Income and Expenses of a Partnership or an S Corporation.
• Claiming prior disallowed passive losses. Again, a legitimate landlord tax deduction shouldn’t be wasted.
• Reporting the rental property foreclosure gain or loss on Form 4797.
• Preparing IRS Form 982 if the bank cancelled any mortgage debt and you could exclude it from taxable income through insolvency or discharge of qualified real property business indebtedness.

Do you need a rental property CPA tax accountant to deal with IRS Form 1099-A?

It depends. Landlords who’ve around the block a few times may not. But multiple complex rental property tax issues come into play with a foreclosure and Form 1099-A. It can be frustrating without experience.

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