2NOV 2010 ALABANY IT from Ulster
MORTGAGE DEBT FORGIVENESS RELIEF ACT
Enacted in 2007 and expires end of 2012.
Allows taxpayers to exclude from income certain cancelled debt on their principal residence
May be eligible for exclusion of gain upon sale
5NOV 2010 ALABANY IT from Ulster
Mortgage Actions
Mortgage modification(workout): refinancing to change principal, interest rate, or term for use in main home or other areas
Debt Reduction: Reduction in mortgage indebtedness from renegotiation – Homeowner keeps possession
6NOV 2010 ALABANY IT from Ulster
Possible Lender Transactions
Lender issues: Form 1099-A upon either Foreclosure(lender) or
Abandonment(Borrower) and/or Form 1099-C Upon Debt Cancellation Same calendar year: Debt canceled in conjunction with
Foreclosure or Abandonment Lender has option to issue only Form 1099-C
Short Sale and Deed in Lieu of Foreclosure equivalent to Foreclosure Lender not required to accept and/or cancel debt Typically may occur prior to formal FORECLOSURE
7NOV 2010 ALABANY IT from Ulster
Possible Lender Transactions(continued)
Most mortgages are recourse debt
BOX 5 , Form 1099-A indicates recourse or non-recourse
If lender issues Form 1099-C instead: implies a recourse loan
10NOV 2010 ALABANY IT from Ulster
CAUTION
Most mortgages are recourse debt
Some states have anti-deficiency laws Prevent lenders from pursuing the borrower for
deficiency after foreclosure Mortgages may be classified as nonrecourse
debt subject even if loan contains a promise by borrower to repay the loan
11NOV 2010 ALABANY IT from Ulster
NY STATE
One action state; Lender must choose:
(1) Foreclosing on property (2) Sue to collect debt
12NOV 2010 ALABANY IT from Ulster
Possible Taxpayer Transactions
Debt canceled, abandonment, foreclosure
Form 982 Reduction of Tax Attributes Due to Discharge Indebtedness…..
Gain or loss on sale Schedule D: Worksheet 2
SALE of (MAIN)Home and/or Section 125 EXCLUSION may apply for Gain
Schedule D Loss on principal residence is always ZERO(0)
13NOV 2010 ALABANY IT from Ulster
EXCEPTIONS Eliminate Income
Amounts otherwise excluded from Income (Gifts & Bequests)
Certain student loans
Deductible debt (e.g. home mortgage interest on SCH-A)
Price reduced after purchase (e.g. debt on solvent TP’s property is reduced by seller; basis of property must be reduced)
No listed EXCEPTION is IN SCOPE !!!!!
14NOV 2010 ALABANY IT from Ulster
Exclusions Eliminate Income
Discharge of qualified principal indebtedness
Other areas OUT of SCOPE
15NOV 2010 ALABANY IT from Ulster
ONLY ONE AREA IS IN SCOPE
Discharge of qualified principal indebtedness
Mortgage covers only the principal residence
The residence is the only security for the loan
Provides relief from personal liability
Handles tax attributes of mortgage loan to eliminate/minimize reporting income items
16NOV 2010 ALABANY IT from Ulster
FORECLOSURE OR MORTGAGE DEBT REDUCTION
Rules for everyone:
Mortgage debt taken out must be to build, buy, or substantially improve the principal residence.
Funds cannot have been used to purchase a car, pay off credit card debt, vacations, etc.
Taxpayer can only have one principal residence at a time
Rental properties not eligible
Taxpayer cannot have filed bankruptcy
21NOV 2010 ALABANY IT from Ulster
MORTGAGE WORKOUT
Taxpayer/homeowner retains ownership
Mortgage debt is reduced-partially forgiven
Only principal debt is IN SCOPE ALL other elements OUT OF SCOPE
No taxable gain or loss
Basis (cost) of home-Taxpayers cost is reduced
22NOV 2010 ALABANY IT from Ulster
MORTGAGE WORKOUT(continued)
Taxpayer receives Form 1099-C
BOX 2 DEBT CANCELED
Complete Form 982 for (Qualified PRINCIPAL RESDENCE elements) Check Box 1e Discharge of qualified principal residence
indebtedness Form 1099-C Box 2 entry amount
Line 2 Total amount of discharged indebtedness excluded from gross income
Line 10b Applied to reduce the basis of your principal residence
23NOV 2010 ALABANY IT from Ulster
MORTGAGE WORKOUT(continued)
Taxpayer with nonrecourse debt do not have
ordinary income from cancellation unless lender Offered a discount for the early payment of the debt, or
Agreed to a loan modification that resulted that resulted in the reduction of the principal of the debt
Amount of the principal reduction is canceled debt whether recourse or nonrecourse unless VALID EXCEPTIONS or EXCLUSIONS apply NO ORDINARY INCOME on 1040 line 21
24NOV 2010 ALABANY IT from Ulster
Form 982 Key Entries
CHECK: Line 1e Discharge of qualified principal residence indebtedness
Line 2 total amount of discharged indebtedness
Form 1099-C Box 2
Line 10 b Applied to reduce the basis…… from 1099-C box 2 (amount of debt canceled) for Mortgage Workouts
25NOV 2010 ALABANY IT from Ulster
EXAMPLE: MORTGAGE WORKOUT
Tom and Grace were having difficulty making heir mortgage payments in 2009 after Tom became ill. Rather than go through the expense of a foreclosure, the lender agreed to reduce the principal on their loan. The principal balance before the 11/1/2009 workout was $130,000 and the lender reduced the loan to $110,000.
None of the loan proceeds were used for any purpose other than to buy, build, or substantially improve the principal residence.
Form 1099-C Box 1 Date canceled: 11/01/2009 Box 2 Amount of debt canceled: $20,000 Box 5 Was the borrower personally liable for
repayment of the debt?
28NOV 2010 ALABANY IT from Ulster
FORECLOSUREREAL PROPERTY
Recourse Debt – Debtor responsible for amount not satisfied by property Debt forgiveness income (1099-C) Debt forgiveness income Capital gain possible
Non-recourse Debt – Debt satisfied by surrender of property No income due to cancelled debt – no 1099-C
will be issued Possible gain due to “sale” of property (1099-A)
29NOV 2010 ALABANY IT from Ulster
FORECLOSURE- HOMEOWNER LOSES
POSSESSION Results in sale of property to lender-Taxpayer
receives Form 1099-A: maybe 1099-C
Loss is not deductible
Gain may be taxable-gains highly unlikely
If taxable, gain must be entered on Schedule D manually- does not transfer
31NOV 2010 ALABANY IT from Ulster
SCHEDULE D
RECOURSE NON-RECOURSE
Form 1099-A BOX 5 CHECKED
BOX 5 BLANK
SALES PRICE Lesser of BOX 2 or BOX 4
BOX 2
Form 1099-C BOX 5 CHECKED
BOX 5 BLANK
SALES PRICE BOX 7 BOX 7
VERIFY ELEMENTS WHEN BOTH FORMS EXIST
32NOV 2010 ALABANY IT from Ulster
EXAMPLE 1
Mary Smith purchased her main home in June 2003 for $175,000.
In 2009 she lost her job and was no longer able to make her payments on this recourse mortgage.
In July, Mary moved out of the home to live with relatives.
On July 15, 2009 the bank foreclosed on the home and canceled the remaining amount owed on the home.
The fair market value at the time was $100,000 because of the poor housing market, but Mary still owed $150,000 on the mortgage.
None of the loan proceeds were used for any purpose other than to buy, build, or substantially improve the principal residence.
33NOV 2010 ALABANY IT from Ulster
FORM 1099-A
MARY SMITH
150,000.00
100,000.00
X
1111 LOST DRIVEYour City, YS, ZIP
35NOV 2010 ALABANY IT from Ulster
MARY SMITH FORECLOSURECAP GAIN WORKSHEET - LOSS
MUST OVERRIDE to 0
36NOV 2010 ALABANY IT from Ulster
MARY SMITH FORECLOSURESCHED D ENTRY – LOSS
SCH D must be filed with return
37NOV 2010 ALABANY IT from Ulster
EXAMPLE 2: FORECLOSUREGAIN WITHIN EXCLUSION
Mary Smith purchased her main home in June 2003 for $175,000. (From 1st Example)
Change purchase price to $80,000
40NTTC TRAINING 2009
MARY SMITH FORECLOSURENON-TAXABLE GAIN
2ND Entry Required to Record Exclusion -= Zero out Gain
SCH D must be filed
41NOV 2010 ALABANY IT from Ulster
Debt Cancelation
Determine EXCEPTION or Exclusion Complete Form 982
1099-C Box 2 to Line 2 Determine appropriate Part I item (a,
b ,f) If ORDINARY INCOME (IN SCOPE)
1099-C Box 2 to 1040 Line 21 (OTHER INCOME)