When you abandon property that secures a loan, such as a mortgaged home, the lender sends you Form 1099-A to report the information you need to calculate your gain or loss on the abandonment. The 1099-A doesn’t report the amount of debt your lender has forgiven. However, your lender has an obligation to report the forgiven debt on a 1099-C after sending you the 1099-A.
What is Abandonment
Voluntarily abandoning your property, such as your home, doesn’t have the same implications as a foreclosure on the home. Instead, it merely indicates your intention to permanently relinquish possession of the property without transferring legal title to it. Once your lender becomes aware of the abandonment, it may send you a 1099-A form that reports the date of your abandonment, the outstanding loan balance and whether you’re personally liable for its repayment. However, if the lender forgives part of your outstanding debt, it has the option of providing a 1099-C, which includes all information on the 1099-A as well as the amount of your cancellation, or sending it at a later date after the 1099-A.
If your mortgage is nonrecourse, meaning that you aren’t personally liable for repayment of the outstanding mortgage to the extent it exceeds the value of the home you abandon, you must treat the abandonment as a sale and report the resulting gain or loss on your tax return. For purposes of calculating your capital gain or loss, you subtract the outstanding mortgage balance from your tax basis in the home and report the result on Schedule D. Your tax basis is equal to the price you initially acquired the home for, most of the closing costs you paid and all home improvements you made prior to the abandonment.
Abandoning property that secures a recourse loan is not subject to reporting on your tax return in the year of abandonment. This is because you remain personally liable on the outstanding balance of the loan, even if the value of the property is less than the balance. Therefore, you don’t report the gain or loss until you sell the property or the bank forecloses on the home.
Foreclosure and Debt Forgiven
Your lender may decide to foreclose on the home shortly after you abandon it and forgive the remaining loan balance after it sells the property. If this occurs, you will receive a 1099-C to report the debt cancellation. If you have a recourse loan, you must report the gain or loss in the year of foreclosure. However, for purposes of calculating gain or loss, you must use the smaller of the property’s fair market value at the time of foreclosure or the amount of the debt cancellation as the amount you realize, which you subtract from your tax basis in the home. In addition to reporting a capital gain, you also may have ordinary income on part of the debt cancellation.