By David Duner, CPA (Retired)

The real estate market may have some unpleasant surprises for borrowers who lose their property due to abandonment or foreclosure of their real property.  The focus of this article concerns lender and broker IRS reporting requirements after a collection or foreclosure action that results in a short payoff, or the reversion of the property to the lender.

1099-C – Cancellation of Debt

Who Must File

Any organization in the business of lending money is required to file form 1099-C for the cancellation of a debt.  The lender is not responsible for determining the taxability or non-taxability of the debt cancellation.  The issuance of form 1099-C does not connotate any determination as to taxability.

When to File

A cancellation of debt occurs on the date an identifiable event occurs and when the facts indicate that the debt will never have to be paid by the borrower.  Identifiable events include:

  • discharge in bankruptcy;
  • foreclosure;
  • short sale;
  • expiration of the statute of limitations for collecting the debt;
  • an event that bars the creditor’s right to pursue collection;
  • an agreement between the creditor and the debtor to discharge the debt at less than full consideration; or
  • when a creditor discontinues collection activity and discharges the debt.

For 1099-Cs issued where the debt has not been discharged through some legal proceeding, it is recommended that lenders attach a letter to the borrower which contains the following statement: “This 1099-C is being sent to you as required by the Internal Revenue Service.  This is NOT an acknowledgement by us that the debt has been canceled.  The debt continues to be an obligation payable to us for the balance owing on the promissory note dated ________ in the original amount of ________.”

What Must Be Reported

The 1099-C must contain the following information:

  • The borrower and lender name, address, and federal identification number.
  • The date the debt is cancelled.
  • The amount of the cancelled debt.  This should not include amounts received in a settlement agreement, foreclosure sale, etc.  Interest should not be included in this amount.  Any unpaid liabilities or lender advances on behalf of the borrower, such as property taxes, insurance, etc., should be added to the principal balance of the loan and thus will increase the cancellation of indebtedness income.
  • A description of the debt.  For example, “mortgage”.  Be as specific as possible.  When filing a combined form 1099-C and 1099-A, a description of the property and its fair market value should be included (see below).

Form 1099-A – Acquisition or Abandonment of Secured Property

When to File

A 1099-A form is filed if:

  • The foreclosure results in the real estate reverting back to the lender;
  • The lender has reason to know that the property has been abandoned;
  • The real estate is ultimately sold at a trustee’s sale on an underbid at an amount less than the outstanding principal balance due on the loan;
  • There is a deed in lieu of foreclosure.

What Must Be Reported

The 1099-A must contain the following information:

  • The borrower and lender name, address, and federal identification number.
  • The date of the lender’s acquisition or knowledge of abandonment.  Ownership interest is acquired when possession or title is transferred to the lender.  If there is a redemption period in which the borrower can redeem the property, ownership interest is not acquired until the end of the redemption period.
  • The amount of the debt owed when the lender acquired title or possession. The amount of the debt does not include accrued interest or foreclosure costs.  Previous lender advances can be included as discussed above.
  • The fair market value of the property.  Generally, the lender’s gross foreclosure bid price or the proceeds from the foreclosure will be considered the fair market value.  If an abandonment of the property occurred, the property’s appraised value will be the fair market value.
  • Whether the borrower is personally liable for repayment of the indebtedness.
  • A general description of the property consisting of sufficient identification of the property.  This can include the property’s address, or the legal description.

All real estate is covered by the reporting 1099-A and 1099-C requirements, including personal residences.

If, in the same calendar year, a lender forecloses and the lender acquires the property and there is also a cancellation of indebtedness, it is not necessary to file both forms for the same borrower.  Filing a form 1099-C only will meet Form 1099-A filing requirements through the completion of boxes 5 and 7 on Form 1099-C.

 

In cases where a first trust deed holder forecloses on the secured property and the second trust deed holder knows or has reason to know of such foreclosure, the second trust deed holder also must file form 1099-A, even though no part of the second trust deed was satisfied by the proceeds of the foreclosure sale.

In cases involving fixed investment trusts or other similar “pooling arrangements” where investors hold undivided beneficial interests in the loan, the trustee, recorded owner, fund administrator or person acting in a similar capacity (such as a loan servicing agent) is treated as the lender for purposes of the reporting requirement.

Form 1099 Due Dates

All 1099 forms need to be sent to the IRS by February 28, 2026 and the borrowers’ copy must be sent no later than January 31, 2026.

Penalties

Filers may be subject to a penalty for failure to file a correct information return by the due date without demonstrating reasonable cause.  The penalty applies for failure to

  • File timely;
  • Include all information required to be shown: or
  • Include correct information.
  • The amount of the penalty is based on when the correct 1099 form was filed. The penalties for failure to file a correct information return are as follows.
  • $60 per form if it was filed within 30 days after the due date, with a maximum penalty ranging from $239,000 to $683,000 per year.
  • $130 per form if it was filed by August 1 with a maximum penalty ranging from $683,000 to $2,049,000 per year; and
  • $340 per return if it was filed after August 1 with a maximum penalty ranging from $1,366,000 to $4,098,500 per year.

The range in the maximum penalty is determined by whether the filer is considered a small business or a large business. If a failure to file a correct information return is due to intentional disregard of the filing requirements there is no maximum penalty.  The IRS charges interest on the penalties.  Penalties can be reduced or removed if the filer acted in good faith and can show reasonable cause.

Record Retention

Copies of each form must be retained for four years from the filing due date, including extensions.

Electronic Filing Requirement

If a total of 10 or more information returns (i.e. other 1099 forms, 1098 forms, W-2 forms, K-1 forms, etc.) 1099-A and 1099-C forms must be filed on magnetic media or electronically to the I3RS.  For electronic filings, the due date to send the forms to the IRS is March 31.

Filing for an Extension

For paper or electronic filing, a 30-day extension of time to file may be requested by sending in an IRS form 8809, Application for Extension of Time to File Information Returns.  No signature or explanation is required for the extension.  Form 8809 must be filed by the due date of the 1099 forms in order to receive the 30-day extension.

It is always suggested to consult your tax advisor regarding the requirements to file forms 1099A’s and 1099C’s.

David Duner, CPA (Retired) is currently working part-time as the controller for Val-Chris Investments, Inc. in Irvine, CA.  David Duner provided audit and tax services to the private mortgage industry for over 30 years.  He can be reached at DavidDunerCPA@Outlook.com.