EX. When someone looses their home to foreclosure, and there is a deficiency (bank lent 100k, but only got 75k through the sale of the property) will the bank send the previous owner a 1099 for 25k?
The bank is required by Federal Tax Regulations to issue a Form 1099-MISC for the deficiency. This is true for any loan for a house, car, etc., if the amount is $600.00 or above.
This is required because the bank or lending institution takes a tax write-off for the deficiency against income it earned on other ordinary business operations.
There is no choice … the same as a settlement attorney or company issuing a Form 1098 for the sales revenue that is paid to the seller. Again, required by IRS Regulations.
Now, when the individual receives the Form 1099, it depends on their personal individual income tax situation whether that income is taxable. This varies from individual to individual. It still must be reported because the IRS has received a Federal Copy from the lending institution that there was a deficiency amount that was forgiven.
So, depending on the outcome of the debtor’s tax return, it may (or may not) be taxable income but it is still reportable income that must be reported on the Individual Income Tax Return Form 1040 for that particular reporting year.
We know because when the individuals get the Form 1099, they call us wanting to know “what up with that”, and we tell them the rest of the story … “it just depends”.
Hope this answers your specific question.
Best of luck in your future endeavors, remember you always make your money on the buy.
Technically, the Bank has NO choice in whether they send a 1099C or not. They MUST send the 1099C to anyone who has received debt forgiveness, whether it be an agreed upon short sale, or a foreclosure sale, no matter whether a deficiency judgment is obtained or not.
Now, the MUST is in the same vane as, we MUST drive the speed limit… not many of us do, but when confronted by law enforcement, we usually slow it down for a period of time. Banks tend to ignore their obligation under the tax code the same way, until confronted. This may become much more a hot button for IRS in the coming year or so, due to lots of write offs associated with debt forgiveness.
The bottom line here is, if the bank/lender is going to deduct the loss, they MUST send a 1099C to the party who benefited from the loss… whether the benefactor of the loss considers it so… is another matter, and most won’t. Most folks who experience a foreclosure or qualify for a short sale will be exempted from paying taxes on the debt forgiveness, as a result of being insolvent, if not having been discharged under the Bk code. This may be the reason that the IRS is lax on enforcing the non-issued 1099C’s due the fact that the enforcement would likely result in NO more tax recovery anyway.