1099-A vs. 1099-C

Posted on October 22nd, 2012

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What is the difference between a 1099-A and 1099-C, and how will we know when our bank canceled our mortgage debt?

A creditor is required to issue a 1099-A when a borrower abandons real or personal property.  According to the IRS 1099-A instructions, “An abandonment occurs when the objective facts and circumstances indicate that the borrower intended to and has permanently discarded the property from use.”

A 1099-A is not a notice of forgiveness.  It is unclear what the purpose of a 1099-A is, other than to alert the IRS that at some point in the future the entity reporting the borrower’s abandonment it may issue a 1099-C.

A 1099-C is a notice to the IRS that the financial institution has forgiven or canceled a debt of $600 or more.  See the IRS Instructions for Forms 1099-A and 1099-C and IRS Form 982 to learn more.   As indicated below, it is important to understand the distinction between writing-off a debt for financial or accounting purposes as opposed to legally forgiving the obligation.

If the financial institution issues a 1099-C to you, then it has cancelled the debt (on its books) and you must report the amount on the 1099-C as income.  Fortunately, the Mortgage Forgiveness Debt Relief Act allows taxpayers to exclude income from the discharge of debt on their principal residence.  It includes the cancellation of the complete debt via short sale, writedown of principal as well as renegotiation of the mortgage terms.  It should be noted that the Mortgage Forgiveness Debt Relief Act is set to expire at the end of 2012.  Moreover, it does not apply to second homes or investment property.

Many taxpayers and preparers alike have the mistaken belief that if the financial institution issues a 1099-C to you, it will not pursue you for the deficiency balance because it has deducted the loss on the loan from its taxes.  Some erroneously feel it is actually precluded from doing so, the rationale being that the lender would be “having its cake and eating it too”. Wrong!  There is no guarantee that the financial institution will not pursue you for the deficiency balance.  It has given up none of its legal rights to do so.  It need only amend its tax returns at a later date to prevent “double dipping”, ie, claiming the loss deduction while also recovering the loss.