When a property you own is recently foreclosed, repossessed, or abandoned, you are likely to receive this tax document IRS Form 1099-A. This document may look quite frightening on paper, nevertheless, it is of great importance when it comes to calculating your taxes. This is the details of IRS Form 1099-A and its applicability as well as how you can file taxes with it correctly.
What is IRS form 1099-A?
IRS Form 1099-A is an informational tax form that lenders file when property used as security for a loan is foreclosed, repossessed, or abandoned. This main goal of this form is to communicate to you as well as to the IRS the current state of the property.
The information on this form is important because it is used by the IRS to figure out whether you have a gain or loss or other income that can be taxable on that property.
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When do you receive form 1099-A?
The lender will send you Form 1099-A by January 31 of the year following the property event. It means, if the property was foreclosed in 2023, the form will be available by January 31, 2024.
If you do not receive the form, contact the lender immediately for a form.
How to fill form 1099-A?
Form 1099-A contains a number of key details that you will need to complete your tax return:
- Box 1: State the date the lender acquired the property or became aware it was abandoned for an abandoned property
- Box 2: Write down the unpaid principal balance on the loan.
- Box 4: Indicate the market value of the property at the time of acquisition or abandonment.
- Box 5: State whether you were personally liable for repaying the debt. So you check the box if this was the case.
- Box 6: A description of the property, such as its address or other identifying details.
How to use form 1099-A to file your taxes
When you file your taxes, you will use the information on Form 1099-A to calculate one or both of the following:
- Gain or loss from the property transaction
- Taxable income from canceled debt
Calculating gain or loss
If your property is foreclosed, repossessed, or abandoned, it is treated as if you sold the property. To find out a gain or loss, you need to compare the “sales price” (based on the loan balance or fair market value) to your adjusted basis in the property.
- If Box 5 is checked (you are personally liable for the debt), use the lesser of the loan balance or fair market value as the sales price.
- If Box 5 is not checked (you are not personally liable), use the loan balance as the sales price.
Reporting canceled debt income
If your lender cancels part of your loan, the forgiven amount might be considered taxable income. However, exceptions apply, such as for certain qualified mortgage debt. The canceled amount is only taxable if Box 5 is checked.
Where to apply the form’s information on your tax return
Depending on your situation, you might need to use different tax forms:
- Schedule D: For reporting capital gains or losses if the property was an investment or business asset.
- Form 4797: To claim ordinary gains or losses that are associated with business assets.
- Form 1040: For reporting taxable income resulting from debt cancellation if relevant.
If you are not certain how these calculations are done, you can seek the help of a tax expert, or if you wish, install a tax software program that can help you crunch the numbers.
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Do you need to file form 1099-A?
No, you do not need to file this form. The responsibility for filing Form 1099-A falls on the lender. Your role is to use the information provided to complete your tax return accurately.
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