When you take out a loan to buy property, lenders often require the loan to be secured by the property itself. If ownership of the secured property is transferred to the lender through foreclosure or if you abandon the property, tax law may treat the event as a sale, resulting in either a gain or a loss. If the lender takes possession of the secured property or has knowledge of the abandonment, they typically issue Form 1099-A, Acquisition or Abandonment of Secured Property.
Form 1099-A provides key details, including the remaining principal balance of the loan and the fair market value (FMV) of the secured property as of the date of acquisition or abandonment. As the debtor, you must determine your amount realized and report any gain or loss on:
Schedule D (Form 1040), Capital Gains and Losses, and Form 8949, Sales and Other Dispositions of Capital Assets for non-business property.
Form 4797, Sales of Business Property for business-related property.
The way the amount realized is calculated depends on whether the debt was recourse (you were personally liable) or nonrecourse (you were not personally liable):
Recourse Debt: The amount realized is the FMV of the property.
Nonrecourse Debt: The amount realized includes the full outstanding debt balance plus any cash or property received.
Cancellation of Debt
Typically, loan proceeds are not included in gross income because they are expected to be repaid. However, if a lender cancels the debt, the forgiven amount may become taxable income. When a commercial lender cancels a debt, they issue Form 1099-C, Cancellation of Debt, to report the canceled amount.
If a lender both acquires the secured property and cancels the debt in the same calendar year, they may issue only Form 1099-C instead of both Forms 1099-A and 1099-C.
Incorrect Information
If you receive Form 1099-A or Form 1099-C with incorrect details, contact the lender immediately to request corrections.
Excluding Canceled Debt from Income
In certain situations, canceled debt income may be excluded in whole or in part.
To determine whether canceled debt related to a primary residence must be included in taxable income, refer to IRS guidelines on reporting forgiven debt from foreclosure, repossession, abandonment, loan modifications, or short sales.