When a house is foreclosed upon by the bank, the owners will 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 will need figure out 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 is found in Box 2; the property’s fair market value is found in Box 4. 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’). Taxpayers will also need to know if the loan was a recourse or a non-recourse loan; the loan was probably a recourse loan if the bank has checked ‘YES’ in Box 5 which asks ‘Was borrower personally liable for repayment of the debt?’
Unfortunately due to the complex reporting of a Form 1099-A, Keystone Tax Solutions is unable to offer any advice on how to enter these amounts into the program. 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, please also review frequently asked questions on the IRS website. If you still haven’t found the answer you are looking for, please contact the IRS Practitioner Priority Service line at 1.866.860.4259.