Missing 1099C

Bank foreclosed on client’s rental property in 2017; principal debt unpaid 130k. Bank sold the property in July 2018 for 75k. Client says the remaining debt has been forgiven. I’m thinking there should be a 1099C issued (no bankruptcy or insolvency), but we can’t get an answer from the bank. We’ve checked IRS income & wage transcript for 2018, but no 1099C showing.

Wouldn’t a 1099C show on the transcript if one was issued?

If a 1099C is out there, we would need to make the election to exclude any qualified real property business indebtedness on the return due on Tuesday. If the bank realizes they didn’t file, could they issue now for 2018 & we miss the election?

Should I have him give me estimated numbers?

Not sure what to do with this one. Thanks for any suggestions

If a 1099-A was issued then 1099-C is not required. Did you check for 1099-A in either 2017 or 2018?

In my experience banks are absolutely horrible with their reporting of foreclosures and cancellation of debt. Even when forms are issued they are rarely 100% correct. Get all of the facts and prepare the return with what you know to be true.

Regarding the QRPBI exclusion, I don't think I've ever seen a benefit to using it as you are required to adjust the basis by the amount of the exclusion. It's been a while since I've dealt with this (had a ton back in the 2008 housing collapse) so maybe I'm not remembering this part correctly but I'm pretty sure it was the case.

Dave Fogel wrote a bunch of great articles on this and was an active contributor on the old TA site. I believe you can still find his articles on his website as well.

Just an observation --- I don't think that the qualified real property business indebtedness exclusion can be used here.

108(c)(2)(A) places a limit on the exclusion. The limit is the principal balance of “qualified real property business indebtedness” immediately before its discharge over the FMV of the property immediately before the discharge.

108(c)(3) defines “qualified real property business indebtedness.” 108(c)(3)(A) requires it to be secured by the property immediately before the debt is canceled (“and is secured by such real property”) (note present tense).

If the property was lost to foreclosure in 2017, then how is the remaining debt “qualified real property business indebtedness” if the property isn't securing the debt in 2018?

I have seen A-s come out first and 1099Cs years later. I believe calculation of taxes owed for the two to be different. You can have a loss with an A and taxes with the C. Especially if refinancing of mortgages for cash not used for improvements to the property.

Thank you for the lead to David Fogel’s site. It was very helpful. After further research, I’m not convinced this debt is canceled; client has nothing to confirm it.

The loan was covered by PMI so I’m thinking the bank got paid by the insurance company. Client can’t locate the PMI doc, so I’m not sure if they will require him to repay the remaining debt. We do know the property was repossessed & sold. I read the foreclosure document on registry of deed site & it clearly states that the client is liable for any amount unpaid after foreclosure sale.

Based on what I’ve read, the client should have received a 1099A when the property was repossessed. Should I report what I believe would have been on the 1099A only ( which will be a loss)?

I’m not sure if the debt is cancelled, so NOT record cancellation of debt until it's confirmed.

Thanks again.

As jon said, a 1099-A can come out one year and a 1099-C can show up several years later. The 1099-A is for the foreclosure, which is treated as a sale where FMV is the sales price. The FMV pays off part of the debt, client still owes the balance. When the bank writes off the balance, it will usually issue a 1099-C for discharge of the debt.

As for PMI, look at the policy. Usually, if the loan was covered by PMI, then when PMI pays the bank, PMI owns the loan. The borrower can still have discharge of debt when PMI writes it off.

Thank you, Dave829 & jon.

One question to answer is whether its a recourse or non recourse loan. I had a client with a recourse loan on a rental property that was foreclosed in 2013. Dave Fogel helped me through the reporting of the loss. I cautioned my client at the time (in writing) that a 1099C could be forthcoming in a later year, or the statute of limitations could barr collections- consult with legal counsel. At that time, forgiveness of debt could apply.

Several years later, I heard from the client that he was being sued for the outstanding balance by a successor owner of the note. Not sure if they got it from the lender, or the PMI insurer. Sent him hunting for a lawyer. Former client contacted me a year or so later, stated that they had settled the matter for aobut 10% of the claim, and wanted to know if the amount paid was deductable.

"Ummm, no and you very likely have forgiveness of debt income. Let me know if you want me to take a look at this".

Last I heard from them, and that was a couple years ago.

These things can have long coattails.