If you have lost your home to foreclosure, or sold it for less than you owed in a short sale, or if you had a car repossessed or gave it back to the lender because you couldnt make the payments, you may have received a 1099-A and/or 1099-C form from the lender. In a previous post, I discussed ways to avoid paying taxes on income reported on Form 1099-C, Cancellation of Indebtedness .

In this post, I will focus specifically on 1099-A forms. These are typically generated when you lose a home or and investment property, or have an automobile repossessed. Because the dollar amounts involved in these transactions can be large involving tens or even hundreds of thousands of dollars this is one area where you truly cant afford to get it wrong.

I do five consults a day on this, says William J. Purdy, an attorney with a Masters degree in taxation who practices in the Law Office of Simmons & Purdy. The American middle class is in here talking about losing their homes. Theres no end to the people who are coming in.

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When you lose a home to foreclosure, you may receive one or both of these forms:

• 1099-A Acquisition or Abandonment of Secured Property and/or
• 1099-C Cancellation of Indebtedness Income

Some transactions such as a foreclosure can result in both forms being sent to the taxpayer. Both of these forms essentially provide similar information but in a different format, and which one youll get largely depends on the lender.

There is no consistency whatsoever in what they are doing, warns Purdy. Some people get an A and some get a C. He adds ruefully, The same people who issue these are the same people who ruined the economy and engaged in reckless behavior. You cant guarantee that they are done correctly .

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Reading Form 1099-A

This form is used when you give up paying for a loan secured by property. This form is typically associated with foreclosures, short sales, or repossessions (including automobile repossessions). Purdy walked me through a 1099-A form, and Ill do my best to do the same here.

Box #2:

Balance of Principal Outstanding. This box should list only the principal balance remaining on the loan, and should not include interest or other fees.

Box #4:

The Fair Market Value (FMV) of the property. In the case of a foreclosure, this will be the sale price if the home was sold. If it was not sold, it will list the Fair Market Value at the time the lender took back the home.

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Gerri Detweiler is Credit.com’s Director of Consumer Education. She focuses on helping people understand their credit and debt, and writes about those issues, as well as financial legislation, budgeting, debt recovery and savings strategies. She is also the co-author of Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights . and Reduce Stress: Real-Life Solutions for Solving Your Credit Crisis as well as host of TalkCreditRadio.com. More by Gerri Detweiler

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GH The experts I interviewed for my piece agree this topic is a minefield. Forms are often wrong and its very hard to get them straightened out when they are. The best advice I can give you is to talk with a tax professional (CPA or enrolled agent) as soon as possible for guidance to minimize the taxes youll have to pay as a result. I wish I could give you more DIY advice but given the amount of money involved, and the fact that youre talking about the IRS here, Id recommend you get expert help.

www.Credit.com Gerri Detweiler

GH Generally, the 1099A indicates abandonment of the property. It does not indicate whether they can still come after you for the balance (recourse) and it doesnt indicate whether the property was sold or not. As Mr. Purdy indicated when I interviewed him, some lenders send both a 1099-A, and some send a 1099-C, while others send both. He also pointed out that there are mistakes made.

Please find a tax professional with experience in real estate issues to help you handle this. Theres too large amount of money involved to take a chance that you do it wrong and then hear from the IRS a couple of years down the road.

In addition to the tax issues, you must find out for sure whether you could be held liable for the deficiency. If this is a recourse loan, the lender could potentially come after you for that balance. This may not happen right away, so dont assume that just because you havent heard from the lender that they arent going to try to pursue the deficiency. It would be a really good idea for you to talk with a bankruptcy attorney.

I know that letting the property go into foreclosure was probably a very difficult decision, but it was only the beginning. If you really want to put this behind you so you can breathe, you need to make sure you get professional advice.

Shane Sparks

What can I expect from a Primary residence that I walked away from with a second mortgage?

www.Credit.com Gerri Detweiler

Shane You need to meet with an attorney asap. Depending on the laws in your state, the lender may try to come after you for the deficiency. In addition, you may receive a 1099 which could have tax implications.

A bankruptcy attorney can help you evaluate whether you need to consider filing to avoid either of those scenarios. The first consultation will be free and confidential.

Gerri Detweiler

Jeff,

It doesnt matter where the home was located. What matters is whether you qualify for an exclusion under the Mortgage Forgiveness Debt Relief Act.