Home > Personal Finance > More Confusion Over the 1099-C

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The last few weeks we’ve been flooded with questions about 1099-C and 1099-A forms sent to consumers who have defaulted on credit cards, auto loans, or mortgages. I’ve found it frustratingly difficult to get even basic answers to some of these questions. I’ve queried numerous tax professionals, and sometimes received conflicting advice. The Internal Revenue Service did not respond to my repeated queries.

But for two questions related to cancelled debt on real estate, I struck pay dirt when it dawned on me that I should try the National Association of REALTORS®. Sure enough, they pay close attention to tax issues that affect homeowners, and they were quick to respond to my questions.

The answers to these two questions were provided by NAR Tax Counsel Linda Goold. It’s important to emphasize that the information here is not a substitute for professional tax advice. If you have any questions about how to handle a 1099-C or 1099-A- related issue, I strongly recommend you get help from a qualified tax professional.

Question #1: Are HAFA Payments Taxable?

The Home Affordable Foreclosure Alternatives (HAFA) program provides homeowners who agree to sell their homes using a short sale with up to $3000 in relocation expenses. Will they have to pay taxes on those payments? A reader, Gayle, asked:

I did a short sale on my house last year and about $52K was the amount of the debt forgiveness. I also received $3000 for the Home Affordable Foreclosure Alternatives (HAFA/RASS) relocation assistance program. But I have not received a 1099C for this $3K and am not quite sure who to ask for it. Is this an amount that will be fully taxed?

Answer: Goold said in an email, “We’ve wrestled with this issue with Treasury for quite awhile” then went on to share the reply received from the Treasury Department Homeownership Preservation Office:

“While there is no IRS directive that I can point you to, the Internal Revenue Service has consistently held that governmental payments made under governmental programs for the promotion of the general welfare are not includible (sic) in an individual recipient’s gross income (general welfare exclusion). This includes borrower incentive payments received under any TARP program including the borrower relocation incentive under HAFA. However, to the extent that moving expenses are tax deductible, a borrower in a HAFA transaction must reduce the moving expenses by the amount of the relocation incentive before itemizing this expense. In other words they can’t double dip.”

How Does PMI Affect Forgiven Debt?

Some loans carry PMI—private mortgage insurance—a fee that the homeowner pays each month to protect the lender in the case of default. If a mortgage carrying PMI goes into foreclosure, the insurance company may have to pay the lender for some of the loss incurred. Does that affect the homeowner? Lauren wrote:

My question is if the PMI company protected the bank from part or all of the deficiency, shouldn’t the amount on my 1099-C be the deficiency less the amount this insurance covered? How is it fair that the bank can claim it as a loss if they were paid back?”

She says she’s asked the bank, loan officers, realtors and even her accountant and no one knows the answer. “Maybe banks are allowed to double dip!” she says.

My initial thought was that the loss that the bank suffers and the amount reported on the 1099-C (or 1099-A as the case may be) are separate matters. The IRS requires the lender to report forgiven debt on a 1099-C because it considers that amount income to the borrower. The IRS expects the taxpayer to include it in her taxable income, unless she can show that she qualifies for an exclusion such as the insolvency exclusion or the Mortgage Debt Relief Act exclusion.

Goold’s response confirmed my initial reaction. She wrote: “The only thing reported is the amount that the lender forgave. The borrower has to include the forgiven debt (as provided on the 1099C) on Form 982 with the regular 1040 tax return, but the income isn’t taxed (so long as they meet the criteria for tax-free treatment). The PMI payment is completely separate from that. Usually the PMI payment goes to the lender, not the borrower. But if the bank forecloses and the PMI pays the lender later, then the questions about whether it’s income would go to the lender, not the borrower…Net or gross, the amount paid to the lender wouldn’t affect the borrower’ tax return.”

In my next installment, I tackle the problem of 1099-Cs being sent for very old debts: 20 years in one case! Stay tuned.

For more advice on how to handle 1099-Cs read What is a 1099-C? Your Top 11 Questions Answered.

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  • Ashley Martin

    Can the PMI issue a 1099C for the same debt that the bank issued a 1099C for in a prior year?

    The bank issued a 1099C in 2011 and now the PMI is wanting to collect on the full amount..PMI has turned this over the a debt collection agency. I am concerned that the PMI will issue a 1099C and it is for the same debt as the bank. This would double dip the tax liability. Could this be possible? What steps should I do take if this happens? I sent the PMI debt collector a copy of the bank’s 1099C and they reviewed but they still want to collect and now for a larger figure than what the bank forgave.
    Additional information
    The original 1099C was for a foreclosure, now the PMI wants to collect what they paid the bank. I wouldn’t think that the collection of reimbursement for insurance would be considered a legal debt. I understand it is for a deficiency. Since a 1099C was issued for this same money they are trying to collect for. Two 1099C’s for the same money? Would the IRS allow this, you would be paying tax twice on the same amounts because the PMI is trying to collect the same money not a gap amount.

    • http://www.Credit.com Gerri Detweiler

      Thanks for your question. These forms can be a mess, no doubt, and there aren’t always straightforward answers.

      I have written about the fact that some PMI companies are coming after borrowers here: Mortgage Insurance Shocker: Collections After Default And we’ve also published an article answering a somewhat related question about PMI and 1099-Cs.

      I should also point out that the fact that the bank sent a 1099-C doesn’t necessarily mean they “forgave” the debt. The IRS requires they file that form in certain circumstances, but in some cases they can still try to collect from the borrower, depending on the terms of the loan and state law.

      You should not have to include the same debt twice in your taxable income. (Did you qualify for the Mortgage Debt Forgiveness Relief Act?) If the PMI company issues a 1099-C then you can first try calling the IRS to explain that it’s a duplicate to see if they can help. But if they can’t, then you’ll need to get a tax professional who has experience with these forms to assist.

      Sorry I can’t be more specific but the IRS has provided no guidance that I am aware of for these specific kinds of situations. Ugh.

    • Gerri Detweiler

      Ashley – the 1099-c and the PMI trying to collect from you are two separate issues, even though they would seem related. The IRS specifies the circumstances under which a 1099-C should be issued, and one includes foreclosure. Whether the mortgage insurance company can try to collect from you depends on the terms of the contract, state law etc. I wrote about that in this story: Mortgage Insurance Shocker: Collections After Default.

      That said, I don’t believe you should have to pay taxes twice on the same cancelled debt. I would imagine that if they issue you a new 1099-C then you can explain to the IRS that you already accounted for that debt in a previous tax return. It may require the help of a tax professional – you’ll have to figure that out when and if it happens.

      Good luck with this and let us know how it turns out. These forms are really creating a mess for some taxpayers!

  • Phyl

    Our primary residence was foreclosed on in Sept 2011. We received a 1099 A for 2011 even though the final legal process steps weren’t done until Feb. 2012. We have never recieved a 1099 C. We do our taxes on Turbo Tax and when we intered the 1099 A it then asked if we received a 1099 C. When we entered “No” it didn’t go any further. What should we do now?

    • Gerri Detweiler

      There are several things going on here.

      1. Have you looked at Publication 4681 to see if you qualify for the Mortgage Debt Forgiveness Tax Relief Act?

      2. If not, have you looked at that same publication to see if you qualify for the insolvency exclusion?

      3. According to the IRS, you must report cancelled debt even if you don’t receive a 1099-C. However, it can be tricky for you to do that since you don’t know what they are going to report for the amounts.

      Is there any way you can meet with a tax professional to help you figure this out? If you qualify for the insolvency exclusion but not the other one, it might make sense for you to claim it on your 2012 tax return rather than waiting until your financial situation has changed (and perhaps improved.) I am not a tax pro, and I would feel most comfortable if you met with someone who could advise you here.

  • http://credit.comnewsandadvice Janalee

    We filed chapter 13 in May 2011, the bankruptcy court discharged our 2nd mortgage which is the home that we live in and have lived in for 28 years, now we just received yesterday (February 2, 2013) a 1099-C for 50,368.92. What does this mean? Do I need to contact our banckruptcy lawyer or just go to a professional tax service? will we have to pay taxes on this amount?

    • Gerri Detweiler

      Janalee – If you discharged this debt in your bankruptcy then you can just use Form 982 to tell the IRS that you qualify for the bankruptcy exclusion. You’ll find more details in this story: Just Received a 1099-C? Don’t Freak Out!

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  • Mitch

    I received $3000 in HAFA funds but also a $20000 incentive from Chase to short sale. Both HAFA and the Chase incentive were listed on the HUD 1 and the amount due to Chase from the buyer was reduced by these incentives. Would the $20000 incentive be taxable?

    Or would the 20000 be included in the 1099 deficiency amount?

    I am not so worried about the deficiency as our home is in AZ (anti-deficiency state) and also was covered in a 2009 bankruptcy so I believe we are not responsible for that as we did not reaffirm. But I am wondering about the $20000 incentive. Thanks!

    • http://www.credit.com Gerri

      That’s a great question Mitch. I hate to give that standard answer of “it depends,” but I think it does depend on whether the lender sends a 1099 for that amount. If so, you’ll have to include that amount in your taxable income. So I’ll give you the other standard answer: check with your tax advisor.

      Maybe one of our other readers has participated in one of these deals and can weigh in with their experience.

  • David

    Hi Gerri, I liked what you dug up above but I can’t seem to find anything on a twist to that subject. I went through foreclusre and relieved by the first lien holder however prior to foreclosure the second lein holder had already turn over to the PMI company. Therefore no relief from the second lien holder and now the PMI company is working me for reimbursment. Are there any relief options for this?

    • http://www.Credit.com Gerri


      I wrote about this in another story, Mortgage Insurance Shocker: Collections After Default. You are not essentially dealing with the mortgage insurer as if they were the lender. You may need to get some legal advice at this point, especially if the amount is large.

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