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1099 REPORTING - IT'S THE LAW! - OR IS IT???

By Richard Zaretsky

Real Estate Attorney with THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY

March 28, 2008 03:07 PM

1099 SHORT SALE REPORTING - IT'S THE LAW! - OR IS IT???

Since I have developed my SHORT SALE law practice I have a lot of clients that are in foreclosure or close to it. They all ask me about 1099 reporting and if the bank can forgive the debt and not issue a 1099. Lots of blogs say that plenty of banks don't issue 1099's on forgiven debt. Others say that the law is that if the lender does not report, it is in trouble with the law. The General Instructions from the IRS applies penalties for not filing informational returns (such as 1099's).

Now let's see what the law really says.

Debt forgiveness triggers two types of requirements depending on the circumstances.

1099-C The 1099C is when there is a cancellation of debt. This would apply to the normal short sale, where the lender takes less than the amount of the mortgage debt so the house can be sold. If the lender does not pursue the borrower for the short fall, then the 1099C is to be issued by the lender to the borrower.

1099-A The 1099A is when there is an abandonment of property and cancellation of debt. This would apply to a deed in lieu of foreclosure or to a foreclosure sale where the possession of and obligation to maintain the property is transferred to or obtained by the lender, relieving the borrower of the continued obligation of the debt.

The requirement to issue the 1099-C or the 1099-A is an obligation of the lender. HOWEVER, FOR 2008 AND PRIOR YEARS, FAILURE TO FILE A 1099-C CARRIES NO PENALTY ACCORDING TO IRS INSTRUCTIONS. Penalties usually associated with the failure to report a 1099 are found in the General Instructions at Part O. It appears that the exception for non-reporting is only to apply to 1099-C.. The 1099-A for abandonment still carries the IRS penalties for non-reporting.

If a borrower is issued a 1099 A or C, that sum reported can all or partially be charged to the borrower as ordinary income. There are several ways to avoid the effect of the reporting of that ordinary income, but that is for another article.

So, for now at least the lenders are indeed free to cut deals NOT TO REPORT forgiven debt without a penalty to the lender.

It doesn't take a tough negotiator to get the deal for non-reporting in writing from the lender - it takes knowing the law and the rules as well as or better than your adversary. Now you know how to pull out the facts and slam dunk the lender's response that they have to report - "it's the law". But here is a caveat - not reporting income is a crime, so consider the consequences.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com New Website www.Florida-Counsel.com. See our easy to find articles at Need Short Sale Information? - These Articles Probably Answer Your Question

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Anonymous

Eddie Kelmenson

If a corporation purchased a piece of property and an individual owning 10% of the corporation personaly guaranteed the mortgage, does the 1099 go to the corporation or the individual upon foreclosure?

Nov 03, 2009 06:46 PM

#26

Anonymous

Aga

We got 1099 A form for our foreclosed rent house. I know that the bank is still the Owner . What happens when the bank finally sells it for less than we owe?

Feb 03, 2010 11:08 AM

#27

Richard Zaretsky

THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL

Florida Real Estate Attorney

Aga

The dispostion of the property AFTER the lender has taken title is NOT a factor in determining the tax event to you. The tax event (the value of the property - ie: how much was made or lost) is determined on the date the bank took back the property or the date it was sold at the foreclosure sale [in any event it is the date you became the "previous" owner]. So if the lender sells the house for double your mortgage amount, you did not make a profit - that later event is just not a factor.

Feb 03, 2010 12:44 PM

Anonymous

Chip

Hi Richard,

We just received a 1099-a for a foreclosed property. But the FMV is much lower than what our realtor says it should be. I have two questions:

1. Does the issuance of the 1099 mean that the debt is forgiven, or can the bank still pursue a deficiency judgement?

2. How do we deal with the FMV. Should we get an appraisal on our own? If so, which FMV should we submit for our taxes?

Thanks,

Chip

Feb 07, 2010 05:26 AM

#29

Anonymous

Tracy

Hi, we short saled our home in Oct. 2009. The closing date was Oct. 2009 and money was received by the lender for the short sale. I called about the 1099-C and the lender stated that we wouldn't get one until 2011 (for 2010) because the paperwork wasn't completely processed until Feb. 2010. Do I just wait and report this on our 2010 taxes?

Feb 09, 2010 07:53 AM

#30

Anonymous

pickle

I live in Michigan. My house went through a sheriff auction last month and my bank bid the full amount due on the loan including late payments. If I understand correctly, this full bid amount will be the FMV for tax purposes? The amount due on the loan minus the FMV will equal 0. Therefore will there be no concellation of debt and no 1099c? Even though in reality the house is worth far less than what I owe on it?

Also, for insolvency purposes, if $70,00 is cancelled, (we are in the redemption period and still trying to negotiate a short sale), do we need to be insolvent by at least $70,000? If we are inslovent by say $30,000, will we owe taxes on $40,000?

And last, we took a cash out refinance, many years ago. Most was spent on home improvements. Do we have to show itemized receipts for home improvements to be exempt from COD under the mortgage debt relief act?

If all else fails, the most we can owe taxes on will be the difference between the originating loan and the price that was paid for the home at the foreclosure auction?

Thanks,

In a Pickle in Michigan

Sep 04, 2010 11:47 AM

#31

Richard Zaretsky

THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL

Florida Real Estate Attorney

Dear Pickle -

You may be in pretty good shape. If the bid was the full amount of the judgment, then as to that loan you have no deficiency.

The rest of your questions are moot because of the full bid on the first mortgage. But I will answer them because others often have the same questions.

Your calculation for the insolvency issue is correct. The amount of your negative insolvency is a direct reduction of the forgiven debt. If your insolvency is less than the forgiven debt, then the difference is taxable.

Having receipts is the best way to show the cost of the improvements. Cancelled checks also work, or bills and estimates, or even permits that have an improvement value. Must is a big word. But if you don't the burden is on you to show that you did the improvement and what it cost.

Sep 04, 2010 01:39 PM

Anonymous

pickle

Thank you so much for your help, I really appreciate it, I have spent hours and hours trying to figure this all out. We had a short sale offer on our home but the bank refused to postpone the sheriff sale while the offer was pending. They did end up approving the sale but the buyers backed out the day the approval came though. My agent wants me to continue to try to do another short sale during the six month redemption period but it seems like that is just going to put me back on the hook for tax liability and deficiency liability.

Thanks again,

In a Pickle in Michigan

Sep 04, 2010 03:02 PM

#33

Anonymous

Rene

I short sold a home in West Palm Beach Fl. I had a second mortgage of approx 50K. The 1st mortgage agreed in writing not pursue deficiency judgement. The 1st mortgage paid approx 4K to the second to release the lien. At closing, they had me sign a promisary note to repay the balance of the second. Both mortgages were with Wells Fargo. Shortly after the sale, Wells Fargo issued a Satisfaction/Release of Mortgage on the second! Not on the 1st mortgage. Once I saw the Satisfaction/Release, I figured they changed their mind & I would get a 1099. Then a month and half goes by and I am served a papeer for a lawsuit for deficiency on the second. I answered in writing to the bank & the attorney that since a satisfaction/release of mrtgage was issue, that I thought it was over. Looking back, I think the bank meant to issue the satisfaction/release for the 1st, not the second. But at this point, what are my option? Also, is the bank going to be required to issue a 1099 when the satisfied & released a mortgage for less than what was owed?

Mar 17, 2011 03:34 AM

#34

Richard Zaretsky

THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL

Florida Real Estate Attorney

Rene -

First, you need to realize that a satsifaction of a mortgage is not always a satisfaction of a note. Read my article MORTGAGE IS NOT AN OBLIGATION TO PAY - COMMON MISTAKEN ADVICE BY AGENTS .

Second, the lender should have issued a release or satisfaction of mortgage relative to both mortgages in order to clear title. Lenders don't follow through with the release documents very often and it is a chore to get them to do what the law requires. Your title closing agent should be pursuing the release document in order for them to close out their file.

Is it possible you did not understand what you were signing? Alternatively, we do have experieince with lenders suing on forgiven debt, and your situation may fit into that parameter.

If I ran my business like the banks run this part of their business, I would and should be out of business.

Seek the advice of a competent attorney familiar with these issues.

Mar 19, 2011 04:29 AM

Ken Patterson

TPR Properties - Rocklin, CA

Roseville Real Estate, TOP Rocklin Realtor

Richard,

This is ver VERY good stuff! Glad I found your BLOG. Keep those tidbits coming. I negotiate a lot of short sales here in California. So, some of the finer points may not apply here. However, very useful info. Quick clarification if I may. You say, "It doesn't take a tough negotiator to get the deal for non-reporting in writing from the lender - it takes knowing the law and the rules as well as or better than your adversary." in your last paragraph. My understanding of what your saying is that it may be possible for me to negotiate as part of the short sale approval - that the lender NOT send a 1099?

Thanks again! And really, I have seen a lot of BLOGs, and many from Attorney's, that are not really worth much. yours is full of good info!!

Aug 02, 2011 12:16 PM

Anonymous

Kevin

I was a second trust deed holder on a one year private investor note to a vacant residential lot. The borrower defaulted and I had to foreclose and took title of the property in Jan 2009. The first trust deed holder was a friend and a loan originator who convinced me to get in on the deal. He held the first note at 450,000.00, my second note was 120,000.00. I have been unable to sell this property due to the declining market and building challenges on the lot. The equity from my first deed is now gone and I have not paid last year’s property tax. Now the first trust deed holder wants to foreclose, or have me sign a deed in lieu of foreclosure. What are the tax consequences, of me signing a deed in lieu of foreclosure? As a private investor, is he required to file a 1099a? How does this affect my credit? Is there any way I can negotiate how the title transaction is reported to avoid having a deed in lieu on my credit history? There was never any signed agreement or debt obligation between me and the first trust deed holder. We had a verbal agreement that I was not going to be responsible for debt payments on his first note.

Nov 08, 2011 03:21 AM

#37

Richard Zaretsky

THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL

Florida Real Estate Attorney

Kevin - You need to check in your jurisdiction, but for the law in the United States as I know it, if you don't sign the debt instrument you have no obligation to the holder of the debt instrument.

So, you foreclosed but did not assume any senior debt - your deed is subject to that debt.

Thus there is zero impact to your credit (except your financial statement is skinny by the $120,000 you lost) and the deed in lieu is a non-reportable event for your credit history since you have no financial obligation associated with it. You don't have to negotiate anything and you can offer the DIL to make their life easier and maybe they can pay you something for your cooperation.

Nov 08, 2011 12:48 PM

Anonymous

Kathy

I know of a couple who gave a mortgage to a lending institution on investment (vacant) real property with the intentions of resale for profit. Two years later the property had not been sold and lost it's inflated value. The lender accepted a deed in lieu of foreclosure along with a Promisory Note for the difference in the value of the land and the original mortgage balance due. The borrower has since received a 1099-C. Can't the Promisory Note be used to offset the 1099-C, for tax purposes, since it was pledged to the lender for the difference in the value of land and the balance of the mortgage as was the Promisory Note (or is this couple stuck paying taxes on the 1099-C and repaying the debt too)?

Feb 22, 2012 11:03 AM

#39

Richard Zaretsky

THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL

Florida Real Estate Attorney

Kathy (#41) -

The couple should not have received a 1099C as no debt was cancelled. They should contact the note holder (lender) to determine what is the status of the promissory note. They should also check their credit reports to see if that debt is being reported as "paid in full for less than the full amount", which is the credit statement for a short sale or deed in lieu with a waiver of the deficiency.

It may be that the lender has recharacterized the transaction and internally waived the deficiency. But then the note needs to be cancelled, and they need written proof from the lender that the note has been cancelled. Are they making payments on that note? If so, then surely the note is not cancelled. It may be also a good time to negotiate a payoff of that note for a discount, if the note is still existing on the books of the lender.

If none of this gets to the bottom of the problem and gets it resolved, the borrower needs to provide an explanation with their tax return regarding that the 1099C was incorrect. Their CPA should provide that explanation, along with a copy of the promissory note to the lender.

Feb 22, 2012 07:16 PM

Anonymous

Kimberly

Hi Richard:

Stumbled across your blog finding information about NOT receiving a 1099 after foreclosures. Final Summary Judgement has been entered on our investment property since 2008, but it is 2012 and we have not rec'd a 1099.The property has a new owner, etc..

For tax purposes, do I conitnue to claim this property in my taxes since I have not rec'd a 1099 for it or just leave it off until I do? Could I request for a 1099? Would it be from the original lender (as the loan has changed some hands)?

Hoping you can shed some light or point me in the right direction.

Thanks for your help.

Apr 07, 2012 11:33 PM

#41

Richard Zaretsky

THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL

Florida Real Estate Attorney

Kimberly - this venue is not the right place for legal advice.

The article (and some others I wrote) point out that until you either get a release of liability for the deficieny or a 1099C from the lender, you are still liable and thus you have not received income.

The article also states that the IRS allows the non-recognition of deficiency income for 3 years from the event (date of the foreclosure sale in your case) and after that you are no longer able to carry the liability and must declare the income as if there was deficiency forgiveness. This is irrespective of the lender still being able to pursue the debt until the statute of limitations has run.

Changing lenders does not matter.

I don't understand your statement that you "continue to claim the property on your taxes". You don't own it anymore so why "claim it"? What you do have is liability on the promissory note you signed - which is not dependent on you owning the property as it is an independent obligation. The amount of the promissory note has indeed changed because of the cash or value received by the bank when it was sold in foreclosure - but you still have some obligation unless the foreclosure sale bid was eqaual or greater than the amount of the promissory note.

Apr 08, 2012 12:46 PM

Anonymous

Debbie

Hi Richard,

I just received a 1099-a for a foreclosed property. The FMV of the property is $210K and the Bal of Principle outstanding is $357k.

1. Does the issuance of a 1099-a mean that the debt is forgiven, or can the bank still pursue a deficiency judgement?

Please advise.

Thanks,

Debbie

Feb 04, 2013 12:38 PM

#43

Anonymous

Debbie

Richard,

I forgot to mention that the foreclosed property was my primary residence at the time of foreclosure.

Please advise.

Thanks,

Debbie

Feb 04, 2013 12:43 PM

#44

Anonymous

Eileen

Dear Sir,
I just received a 1099-C on the full balance of my short saled home and a for the interest on amount that was due in the time I was delinquent. Along with a interest statement for the IRS to report. I have no assets , no money, no home, can the IRS impose a payment plan that I will a have a hard time to pay out, what can be done if there is nothing to work with

Respectively
Eileen

Feb 15, 2015 10:14 PM

#45

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