How to Report a 1099 for a Deed in Lieu

The IRS considers forgiven debt as taxable income, which you must report on your income taxes.

The IRS considers forgiven debt as taxable income, which you must report on your income taxes.

Before your home goes into foreclosure, submitting a deed in lieu to your mortgage company can release you from most of the mortgage debt associated with the outstanding loan. If your mortgage company sells the home for less than what you owe on the mortgage, you are responsible for the deficiency. If the mortgage company forgives the debt, the Internal Revenue Service considers the amount taxable income, which you must report on your income taxes. The mortgage company is required to report the canceled debt on Form 1099-C, and supply a copy to you and the IRS.

Step 1

Visit the IRS website at irs.gov and obtain Form 1040 and the 1040 instructions.

Step 2

Enter your personal information in the top portion of Form 1040. Complete the section labeled "Income," but stop when you reach the line labeled "Other Income." As of the 2012 tax year, "Other Income" is listed on Line 21.

Step 3

Write "Forgiven Debt" in the first field on the line labeled "Other Income" of Form 1040.

Step 4

Enter the amount from Box 2 on Form 1099-C in the second field. This amount represents the taxable portion of your forgiven debt.

Step 5

Complete the remaining sections on Form 1040 to determine whether you will receive a refund or owe tax to the IRS.

Tips

  • If you receive a Form 1099-A from your mortgage lender, you do not need to report this on your income taxes. The mortgage company is required to report the transaction to the IRS and furnish you with a copy of the statement, but it will continue to seek payment for the debt. You should keep this form with your records.
  • If you meet the requirements for the Mortgage Forgiveness Debt Relief Act of 2007, the IRS might allow you to exclude some or all of the canceled debt from your taxable income. As of May 2012, the act applies only to debt forgiven for the 2007 to 2012 tax years. Refer to IRS Publication 4681 and Form 982 for more information.

About the Author

Angela M. Wheeland specializes in topics related to taxation, technology, gaming and criminal law. She has contributed to several websites and serves as the lead content editor for a construction-related website. Wheeland holds an Associate of Arts in accounting and criminal justice. She has owned and operated her own income tax-preparation business since 2006.

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