Form 1099-A is completed by a lender of a secured loan to report the acquisition of the asset used to secure the loan. In other words, it reports the lender repossessing the asset. This asset can be the item purchased with the loan, most commonly a house or a car. It can also be an item used as collateral, such as a property used to secure a home equity loan or second mortgage.
Purpose and Details
Form 1099-A informs the Internal Revenue Service, or IRS, of two related transactions: the transfer of the asset from the borrower to the lender and the settlement of part or all of the debt through the repossession. Both of these can affect the income of the lender and the borrower for tax purposes. As well as asking for the personal details of both parties and a description of the property, the form asks for the balance of the principal outstanding. This is the amount the person still owed at the time of the repossession, not including any interest charges.
Fair Market Value
The form also asks for the fair market value, which can be a reasonable estimate of what the property would fetch in its current condition. With real estate the figure used here is usually the amount the lender received by selling the property at a foreclosure auction. This may be much lower than the original purchase price, although with real estate it can also be higher if the housing market is booming.
Fair Market Value exceeds Balance of Principal
If the fair market value is less than the balance of principal, the lender must decide whether to write off the remaining debt. If he does, he must report this to the IRS as a loss to the lender and a gain to the borrower. If, however, the fair market value is higher than the balance of principal, the money is in place to fully settle the debt. The borrower will therefore not acquire any tax liabilities from the repossession and sale process.
If you used the asset for business purposes, such as a rental property, you will be considered to have received the balance of the principal when the property was repossessed and the debt settled. This applies even though you received this money in the form of the debt settlement rather than as cash. If the amount you receive in this way exceeds the amount you originally paid for the asset, you may be liable to capital gains taxes and should consult a tax professional.