When a house is foreclosed upon by the bank, the owners typically receive Form 1099-A from the lender showing several pieces of relevant information. The information on Form 1099-A will likely be needed to report the foreclosure properly on the tax return. A foreclosure is treated as the sale of property, and the former property owner will need to calculate their gain or loss on the property. Unlike a normal sale, there is no "selling price". This is where the information from Form 1099-A becomes relevant.
Under the rules for calculating the tax consequences for foreclosure, the taxpayer needs to determine the "selling price" so that gain or loss can be calculated. 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 in Box 2, and the property's fair market value in Box 4. The date of the foreclosure, indicated in Box 1, is treated as the "sale date". Taxpayers also need to know if the loan was a recourse or a non-recourse loan. Generally, if Box 5 is checked YES, "Was borrower personally liable for repayment of the debt?", the loan is a recourse loan.
Form 1099-A is typically reported on the Schedule D. Determining the sale 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.
If the acquisition or abandonment was for the main home and shows a gain, enter Adjustment Code H, “Exclude Some/All of the Gain from the Sale of Your Main Home”, and enter the adjustment amount as a negative number.
If the property was for personal use and incurred a loss, that loss cannot be deducted in the return. Enter Adjustment Code L, “Nondeductible Loss other than a Wash Sale”, and enter the adjustment amount as a positive number.
Note: This is a brief guide on entering acquisition or abandonment of secured into the TaxSlayer ProWeb program. This is not intended as tax advice. We recommend reviewing Publication 544 and Publication 4681 to determine how to report the taxpayer's Form 1099-A. If you are unable to find your solution in these publications, also review frequently asked questions on the IRS website. If you still haven't found the answer you are looking for, contact the IRS Practitioner Priority Service line at 1.866.860.4259.