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How to enter a foreclosure or repossession from 1099-C and 1099-A

by ProConnect Tax Online Updated 1 year ago

This article will help you understand how to report the cancelation of a debt and the income or loss recognized from property that was foreclosed on, was repossessed, was quitclaimed, or involved in a short sale.

Are these transactions taxable?

In these situations, your client may receive a Form 1099-C, Form 1099-A, or both. Your client may need to recognize the cancelation of debt as income and - separately - report a gain or loss from the disposition of property, even though it was foreclosed, repossessed, or abandoned.

These source documents alone don't provide enough information for the program to decide the tax consequences of the transaction. We recommend you review IRS Publication 4681 and Pub. 544 to determine:

  • whether any cancelation of debt income has to be recognized on the return;
  • if the cancelation of debt income is nontaxable (and should be reported on Form 892); and
  • whether the foreclosure or repossession produced a taxable gain or loss.

The following instructions assume that your client was personally liable for the debt.

Where do I enter cancelation of debt income?

If the cancelation of debt relates to personal property:

  1. On the left-side menu, select Income.
  2. Click on SS Benefits, Alimony, Misc. Income.
  3. Scroll down to the Cancelation of Debt subsection.
  4. Enter the amount in Cancelation of debt (1099-C).
  5. Enter the amount of Qualified principal residence exclusion, if applicable. The program will subtract the exclusion from the total cancelation of debt you enter, and generate a statement with the return. You'll also see a diagnostic reminding you to complete Form 982.

If the cancelation of debt relates to business property, include it in income on the business activity, instead. For example, the gain from a cancelation of debt on a property used in a Schedule C business should be entered in the Other income field on the Business Income (Schedule C) screen.

If an exception applies and the cancelation of debt isn't taxable, you'll need to complete Form 982. See the Form 982 instructions for a list of exceptions from reporting the canceled debt as taxable income, and details on completing the form.

Note: If claiming the principal residence exclusion, make sure you follow the steps above to fulfill the Other Income reporting requirements, too.

  1. On the left-side menu, select Miscellaneous Forms.
  2. Click on Discharge of Indebtedness (982).
  3. Check the appropriate box under Reason(s) for Exclusion.
  4. Scroll down to the Form 982 - Reduction Of Tax Attributes (Amounts Excluded) section.
  5. Enter the amount(s) of discharged indebtedness in the appropriate field(s).
    • Entries on this screen only affect Form 982. Any basis or carryover reduced by the discharged debt should be manually adjusted on the appropriate screen of the return.

Where do I enter a gain or loss from foreclosure?

If the foreclosed, repossessed, or abandoned property was for personal use and resulted in a loss, no entry is needed. The personal loss can't be deducted on the tax return.

If the foreclosed property was for personal use, and resulted in a gain:

  1. On the left-side menu, select Income.
  2. Click on Dispositions (Sch D, etc.).
  3. Enter the required information in the grid:
    • Description of property
    • Date acquired
    • Date sold: the date the property was returned to the lender
    • Sales price: the lesser of the property's fair market value or the debt outstanding immediately before foreclosure, plus any proceeds received from the foreclosure sale
    • Cost or basis: your client's basis in the property before the foreclosure or repossession
  4. Click the Details button to expand the input and enter any other required information.
    • If the gain is from the foreclosure of your client's primary residence, you may be able to exclude all or part of the gain. Make sure to complete the Sale of Home section in this scenario.

If the foreclosed property was for business use:

  1. On the left-side menu, select Deductions.
  2. Click on Depreciation.
  3. Select the Details button on the foreclosed property.
  4. Choose the Disposition section at the top of the input.
  5. Enter the Date sold, disposed, or retired (MANDATORY).
  6. Enter the lesser of the property's fair market value or the debt outstanding immediately before foreclosure, plus any proceeds received from the foreclosure sale in Sales price (-1=none).
ProConnect Tax

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