Online, on the radio, and on the television, we’re all exposed to headlines expressing today’s depressed real estate market, as foreclosure rates grow sharply. Aside from a failing economy, there are two tax trends that have come to light.
Form 1099A & Form 1099C
Even for those who are going through foreclosure or those who have filed for foreclosure years ago, lenders are still foolishly sending out Form 1099As as well as Form 1099-Cs. In fact, if a homeowner fails to file the papers, a penalty is to be expected.
Form 1099-A is used for homeowners to report a foreclosure or repossession. If your house is taken by a lender, the lender is to report the fair market value of the property as well as the amount of debt left. The lender too has the ability to check a box which determines whether or not you are personally liable for said debt.
Form 1099-C, or a Cancellation of Debt income form, is used in the event that a lender forecloses on your house and then resells the home but at a value that does not cover the existing debt. In this case the lender has the option of expecting debt payment from you or forgiving the debt. If the debt is forgiven, it is considered COD income, which is, surprise, taxable. While it seems pretty simple to comprehend, there are a lot of problems that come with these two forms. Typical problems include:
· Form 1099-A is received late or not at all
· The form claims you are responsible for foreclosure debt when you’re technically not, or vice versa
· The listed fair market value is extremely high or low
No matter any problems that may occur, lenders and the IRS alike wholeheartedly expect you to report a foreclosure even if the proper form is never received from the lender. The debt you are responsible for will more than likely determine if lenders will be knocking down your front door or if they take their time in sending you a Form 1099-C. Sadly, there isn’t much you can do to remedy the situation.
Avoiding an IRS Audit
IRS Audits are becoming more troublesome for real estate professionals. While some real estate professionals have found wrongdoing in the hands of the IRS, when considering the common laymen in today’s society, it’s typical that many of them are entirely unaware of the specific language that has to be used during an audit, which then ends in a loss for the tax payer. Mismanagement is a common downfall. Thankfully the solution to both problems is easy. With proper representation, a tax payer can come out on top after an IRS audit. Find an agent that knows the right words to say at the right time.