What if the Fair Market Value Is More Than the Balance of Principal on a 1099-A?

If you have an asset repossessed by a lender, you can expect to receive a Form 1099-A from the lender that took the asset into possession. You will need to use the information on the document for your tax return for the year of repossession or foreclosure. You (copy B), your lender (copy C) and the IRS (copy A) will all have copies of the same Form 1099-A.

What Is a 1099-A Used for?

Lenders use this tax form to report both the outstanding debt and fair market value of a repossessed asset. Form 1099-A is most commonly used for home foreclosures. The reason why a Form 1099-A must be filed is that it notifies the IRS of the transfer of the asset from the borrower to the lender.

As a result, the incomes of both the borrower and lender can be impacted for the tax year of the repossession. The gain or loss that is determined on Form 1099-A will be reported on Form 8949 and Schedule D.

Fair Market Value and Form 1099-A

On your Form 1099-A, you'll see a box that asks for the fair market value of the asset. If your lender has sold the asset, the amount received by the seller would go in this box. In other cases, an estimate of what the property could be sold for if it went on the market today would belong in the box. The fair market value is not determined by the original purchase price prior to repossession or foreclosure, and there are three scenarios to consider

  • The asset's fair market value is less than the balance of principal: The lender may write off the debt as a loss. In this case, it will be viewed by the IRS as a gain to the borrower.
  • The asset's fair market value is higher than the balance of principal: The "extra" money will be used to settle the debt. In this case, the borrower does not take on liability when the repossessed item is sold.
  • The repossession/foreclosure includes a cancellation of debt: You should receive something called the IRS Form 1099-C.

For a repossessed asset that was used for business purposes, the IRS will view you as having received the value of the principal when the asset was repossessed. Your debt settlement from the sale will essentially be viewed as a gain. If this happens, you may be responsible for paying capital gains taxes. The IRS will treat any capital gains from foreclosure exactly the same as gains earned from a regular home sale.

How to Get a Form 1099-A

If you had a foreclosure during 2021, you will need to report the activity when filing your 2021 taxes in 2022. Your lender should automatically send a copy of the generated Form 1099-A to you.

If you've gone through a foreclosure without receiving a Form 1099-A for the year of the foreclosure, it's necessary to call your lender to request copy B. If a property that was foreclosed on had more than one mortgage, you will need to check that you're receiving more than one 1099-A.