Basic Concepts

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Form 1099-A from the lender informs both you and the IRS that the lender has accepted real property in partial satisfaction of a secured debt. It does not create the tax liability. It is not documentary evidence of cancellation of debt.

Form 1099-C causes the real problem.  This form from the lender informs both you and the IRS that the bank has cancelled the debt, meaning that the lender has written off the debt and possibly has taken a tax deduction. The foreclosure doesn’t cancel the debt; it merely satisfies part of the total debt which is equal to the value of the property.

The two important concepts with the issuance of these documents are:

  1. Cancellation of debt MAY result in taxable ordinary income.
  2. Because a foreclosure is viewed as a “sale of property,” if you allow real estate to go back to the lender in foreclosure, and it results in a cancellation of debt, then the foreclosure may be a taxable event.

Because these problems involve the interplay between basic contract law, mortgage and anti-deficiency laws (all of which are state law issues), as well as federal tax law, these can be gnarly problems to sort out.  Unfortunately, not many attorneys understand them, and not a whole lot of tax pros either.  We are experts in tax law pertaining to such contract and tax law and are poised to address these tax implications before they become issues.