Explaining the 1099-A

If you get a copy of Form 1099-A in the mail, it's usually not a good thing; the only question is how bad it ultimately is. You get one of these forms when someone you owed money has given up trying to collect and has seized whatever collateral you put up for the loan.

Acquisition or Abandonment

Internal Revenue Service Form 1099-A comes into play when a lender seizes property that secured a debt, or when the lender has concluded that the borrower has abandoned the property rather than pay the debt. Say you owe $200,000 on a mortgage, and you quit paying. At some point, the bank will foreclose and take the house. When it does, it fills out a 1099-A, sending a copy to the IRS and a copy to you. If you have packed up and moved out of the house, surrendering it willingly, the bank can seize the property without foreclosure; when it does, it sends a 1099-A based on abandonment.

Reading Form 1099-A

Though the situation that resulted in a 1099-A might be messy and complicated, the form itself is fairly straightforward. Box 1 gives the date that the lender took back the property or concluded that it had been abandoned. Box 2 says how much you owed. Box 4 is the fair market value of the property. This may be based on an appraisal; if the bank has sold the property, it will be the sale price. The bank puts a check mark in Box 5 if you were personally liable for the debt. Box 6 contains a brief description of the property -- such as the street address of a foreclosed home or the make and model of a repossessed car. (There's no Box 3, in case you were wondering.)

Where the 1099-C Comes In

Where there's a Form 1099-A, you'll usually find a Form 1099-C. On this second form, the lender reports whether it canceled any debt. Say you owed $200,000 on a home, the bank foreclosed, and the home sold for $150,000 at auction. The bank is still owed $50,000. Whether it can try to collect that money from you depends on the wording of the loan contract, your state law and the bank's appetite for pursuing the matter. But often, the bank just writes off the bad debt. In that case, it sends the IRS and you a copy of Form 1099-C, in which it reports canceling $50,000 worth of debt. This matters to you because canceled debt is considered taxable income. When a lender cancels a debt in the same year that it acquires (or you abandon) the property that secured the debt, it doesn't have to file both a 1099-A and a 1099-C. It can just file the 1099-C, since that's the part that most concerns the tax man.

Who Sends a 1099-A

Form 1099-A is used only in cases of secured debt -- loans backed by collateral. Unsecured debt, such as credit card debt, has no collateral, so there's nothing for the creditor to seize, and therefore nothing to put on the 1099-A. (Canceled unsecured debt will produce a 1099-C, however.) Creditors are subject to 1099-A and 1099-C filing requirements if they lend money "in connection with" a trade or business. That means the rules apply not just to banks and credit unions but also to merchants who sell items on store credit.