When property such as a house is security for a loan that is foreclosed upon by the lender, the lender typically issues Form 1099-A to the debtor with details about the foreclosed property. The information on Form 1099-A will likely be needed to properly report the foreclosure on the taxpayer-debtor's tax return.
A foreclosure is treated as the sale of property, and the taxpayer who is the former property owner needs to calculate their gain or loss on the disposal.
The date of the foreclosure is indicated in Box 1, and this will be used as the date the property was disposed of (that is, the "sale" date).
Under the rules for calculating the tax consequences for foreclosure, the taxpayer needs to determine the amount that will function as the "selling price" so that the gain or loss on the disposal can be calculated. The information on Form 1099-A is relevant for this purpose.
Depending on the type of loan, the taxpayer will utilize either the fair market value of the property or the outstanding loan balance on the property for the selling price. Both of these figures are reported on Form 1099-A:
- The outstanding loan balance is found in Box 2.
- The property's fair market value is found in Box 4.
The debtor also needs to know if the loan was a recourse or non-recourse loan. A loan is typically a recourse loan if Box 5 is checked indicating that "the borrower was personally liable for repayment of the debt". Knowing whether the loan was a recourse or non-recourse loan tells you how to determine the sales price:
- Recourse Debt (Box 5 is checked): the sale price is the lesser of Box 2 or Box 4;
- Nonrecourse Debt (Box 5 is unchecked): the sale price is Box 2.
We recommend reviewing the IRS resources below to determine how to report the taxpayer's Form 1099-A. If you still haven't found the answer you are looking for, contact the IRS Practitioner Priority Service at 1.866.860.4259.