I’m dealing with a lender who is not entitled to the tax exemption afforded to qualified mortgages placed into real estate mortgage investment conduits (REMICs). In this scenario, if Lucky Duck Lending had to buy the debt back from Mother Goose because of defects, is Mother Goose required to provide Lucky Duck Lending with a 1099-C? After all, Mother Goose can’t collect her fee on the entire amount.
A Form 1099-C represents a cancellation of a debt from the lender to the borrower who is unable to pay. It represents taxable income to the borrower since they had use of money that they have been forgiven from repayment. If I am following your question and scenario correctly, there has been no debt forgiven, and it was merely transferred from one lender to another. It appears that the borrower is still repaying the same amount, just to a different lender. While the debt may have been transferred at a premium or a discount, that has no bearing on the amount to be collected. Therefore, it seems no debt has been forgiven, so no Form 1099-C would need to be issued.
This reply is based strictly on the information provided. I recommended that you seek professional guidance if you still have questions or the answer provided does not seem to meet your situation. The PICPA website has a handy CPA locator to find a qualified professional in your area.
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Answered by: Eric S. MacCollum, CPA, is a principal with Hudak and Company in Lemoyne, Pa.