If I Get a 1099-A, Do I Still Owe the Debt?

Form 1099-A is issued by lenders when they acquire an interest in property used to secure a loan, such as through foreclosure or repossession, or when they believe the property has been abandoned. Understanding this document is important because it can have tax implications, even if it does not directly mean your debt is gone.

What is a Form 1099-A?

Form 1099-A, “Acquisition or Abandonment of Secured Property,” is an informational tax document lenders file with the Internal Revenue Service (IRS). This form reports when a lender takes ownership of property collateral for a loan, or when the borrower abandons such property. It applies to various secured assets, including real estate and personal property like vehicles.

The form provides specific details about the transaction. It includes the date the lender acquired the property or became aware of its abandonment, the outstanding principal balance of the debt, and the fair market value of the property at that time. Lenders send a copy of this form to the borrower, typically by January 31st of the year following the acquisition or abandonment. The primary purpose of Form 1099-A is to inform both the IRS and the borrower about the change in the property’s status, which can be relevant for determining potential tax gains or losses.

Does Receiving a 1099-A Cancel Your Debt?

Receiving a Form 1099-A does not automatically mean your entire debt has been cancelled or forgiven. This form reports the acquisition or abandonment of secured property, indicating a change in collateral status, not a full debt discharge.

There is a distinction between a Form 1099-A and a Form 1099-C, “Cancellation of Debt.” While a 1099-A reports the property event, a 1099-C is issued by a lender when they have cancelled or forgiven $600 or more of a debt. It is possible to receive a 1099-A without a 1099-C if a portion of the debt, known as a deficiency, still remains after the property event. In some instances, if both the property acquisition and debt cancellation occur within the same calendar year, the lender may issue only a Form 1099-C, which will also include information about the property transaction.

Understanding Potential Remaining Debt

Even after a lender acquires secured property or a borrower abandons it, a portion of the original debt can still be owed. This outstanding amount is a “deficiency balance,” occurring when the amount owed on the loan exceeds the fair market value or sale price of the property at foreclosure or repossession. For example, if a borrower owes $100,000 and the property sells for $80,000, a $20,000 deficiency balance exists.

Lenders may pursue collection of this remaining amount. They can seek a deficiency judgment through court action to obligate the borrower to pay the difference. The ability to obtain and collect on a deficiency judgment depends on various factors, including state-specific legal frameworks. If a deficiency judgment is granted, lenders can use collection methods like wage garnishment or bank levies to recover the debt.

Tax Implications of Debt Forgiveness

If a debt is cancelled, it typically carries tax implications for the borrower. The IRS considers cancelled debt as taxable income, which must be reported on a tax return for the year the cancellation occurs. This cancelled debt is usually reported on Form 1099-C.

However, exceptions and exclusions may prevent the cancelled debt from being taxed. One common exclusion is for insolvency, where a taxpayer’s total liabilities exceed the fair market value of their assets before the debt cancellation. Another exclusion applies to qualified principal residence indebtedness, which refers to debt incurred to acquire, construct, or substantially improve a main home, and which is discharged due to the borrower’s financial condition or a decline in the home’s value. Taxpayers claiming an exclusion for cancelled debt, such as due to insolvency or qualified principal residence indebtedness, generally need to file Form 982, “Reduction of Tax Attributes Due to Discharge of Indebtedness,” with their tax return.