A is for Acquired
If your financial institution acquires a property in full or partial satisfaction of a loan—whether by deed in lieu of foreclosure or by foreclosure—you must file Form 1099-A (Acquisition or Abandonment of Secured Property) and provide a copy to the borrower. This applies to real estate and personal property, such as boats, cars and RVs, which are held for business use. Personal use of tangible property, such as a personal-use auto, does not require a 1099-A.
C is for Cancelled
If you discharge a debt of at least $600 for someone during the calendar year, you must file Form 1099-C.
What if you’ve foreclosed on property and cancelled debt for someone?
If your bank cancels a debt and forecloses on property, then you only need to file Form 1099-C, not both A and C. For example, if your borrower owes $250,000 on a home with a Fair Market Value (FMV) of $150,000 that is transferred to the bank with a deed-in-lieu, there is a reporting requirement. If the remaining debt of $100,000 is forgiven in the same year, a single Form 1099-C may be filed for the year. If the debt is not forgiven until a subsequent year, the reporting is different. File a Form 1099-A in the year the property is acquired, and file a 1099-C in the year the remaining debt is forgiven.
Note that if you do file only Form 1099-C, you will meet your 1099-A filing requirements by completing boxes 4, 5 and 7 on Form 1099-C. However, if you file both forms, you should not complete boxes 4, 5, and 7 on the Form 1099-C.
Also note: In the absence of clear and convincing evidence to the contrary, the proceeds from the sale of the repossessed asset should be used as the asset’s FMV. These are treated as “payments” on the loans, but must be applied to interest first, then principal. If the asset is not sold within a reasonable time frame after foreclosure (for example: 90 days) the sale price may not represent the FMV at the time of foreclosure. In that case an appraisal or some other method to establish FMV should be considered.
When don’t you have to send a 1099?
You do not need to send a 1099 when there is:
- Discharge in bankruptcy, unless debt was incurred for business or investment purposes (This rule generally excludes consumer debt).
- Discharge that is interest only.
- Discharge of an amount other than stated principal (e.g., fees).
- Deemed discharge due to related-party purchase of debt.
- Release of co-obligor as long as remaining debtor(s) are liable for debt.
- Release of guarantee.
Timing issues
These forms are due each year, and there has not been a holiday on reporting these types of transactions. There is a special exclusion of income caused by cancellation or forgiveness of debts related to a borrower’s principal residence; however, the determination of taxability is made at the borrower level, not at the bank level. Your bank or credit union, therefore, is still required to file Forms 1099-A and/or C.
A debt is canceled on the date an “identifiable event” occurs. The IRS lists eight items that meet the definition of “identifiable event,” which should be reviewed in the Instructions for Forms 1099-A and C to see which events apply to your clients. Two of the most common events are:
- A discharge in bankruptcy under Title 11 for business or investment debt.
- A discharge of indebtedness under an agreement between the creditor and the debtor to cancel the debt at less than full consideration.
When any of the eight identifiable events occurs, your legal rights as the lender to collect anything further on the debt immediately cease. This is the point when the debt is considered canceled in the eyes of the IRS and you should stop accruing interest. You may issue the 1099-C either on this date or at year-end so long as the borrower receives a copy on or before January 31 of the year following the cancellation.
For the 1099-A, we generally suggest waiting until year-end to complete the 1099-A. Because you will need to issue one 1099-A (or 1099-C for combined acquisitions and cancellations) that reports all of the repossessions of property related to a single loan for the taxable year, waiting until year-end is especially prudent if, for example:
- The debt is not immediately canceled because there are several pieces of property securing the loan.
- The loan is recourse and you are still pursuing collections for the balance.
- You might end up canceling the balance in the year of the acquisition.
Note: You are not required to file an additional or corrected Form 1099-C if you later receive payment on a prior year debt.
What are the penalties?
In the event you have not filed 1099-A's and 1099-C's for prior years, you may have exposure for penalties. The penalty rate is on a tiered system and ranges from $30 to $100 per 1099, and there is a maximum penalty that can be issued for each year. The penalty rates were increased in 2016.
Please click here for the Treasury Regulation 1.6050J-1T document, which addresses frequently asked questions and 1099 instructions.
If you have additional questions, contact Jeffrey Ring in our Financial Institutions practice group.
Skip to Main Content