Rev. Proc. 2013-16 - Tax treatment of borrowers, Form 1099 reporting by loan holders under mortgage reduction programs 

Rev. Proc. 2013-16 [PDF 133 KB] addresses the tax consequences for borrowers who are participating in the program as well as the reporting obligations for participating mortgage loan holders and servicers.

Guidance for borrowers

As briefly outlined in a related IRS release (IR-2013-8), Rev. Proc. 2013-16 identifies payments made under the programs to mortgage loan holders as payments on the mortgage loans by the U.S. government, on behalf of the borrowers. These payments are generally not taxable to the borrowers under the general welfare doctrine.

However, if the principal amount of a mortgage loan is reduced by an amount that exceeds the total amount of the payments made to the mortgage loan holder, the borrower may be required to include the excess amount in gross income as income from the discharge of indebtedness (which may nevertheless qualify for an exclusion from gross income). Borrowers receiving aid under the program may report any discharge of indebtedness income—whether included in, or excluded from, gross income—either in the year of the permanent modification of the mortgage loan or ratably over the three years in which the mortgage loan principal is reduced on the servicer’s books.

Guidance for mortgage loan holders

Rev. Proc. 2013-16 provides that mortgage loan holders must file Form 1099-C for a borrower who realizes a discharge of indebtedness of $600 or more for the year in which the permanent modification of the mortgage loan occurs:

• Whether or not the borrower reports the discharge as income (in the year of the permanent modification or one-third each year as the mortgage loan principal is reduced)
• Whether or not some or the entire amount is excluded from gross income

Rev. Proc. 2013-16 offers penalty relief for mortgage loan holders that fail to timely file and furnish required Forms 1099-C, as long as certain requirements described in the revenue procedure are satisfied.