foreclosure & mortgage debt forgiveness what are they? why are we concerned? irs pub 4702 irs...
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FORECLOSURE & MORTGAGE DEBT FORGIVENESS
WHAT ARE THEY?
WHY ARE WE CONCERNED?IRS Pub 4702
IRS Pub 970
DEFINITIONS• Foreclosure: Takeover of property by lender,
court process involved– Reportable ON Sched D; Possible Capital Gain may
be Reduced by Exclusion
• Cancellation of Debt; Reduction in Liability of Debtor due to Foreclosure, Repossession, or Negotiation.
• Debt Forgiveness: Cancelled Debt which the taxpayer may exclude from income.
DEBT CANCELLATION
• What is it?– Reduction or Cancellation of Debt by Lender
– IRS Considers this to be Income• Lender Issues Form 1099-C
– Normally must be Included on Tax Return, Line 21 as Other Income
– Can result in Debt Forgiveness
IN-SCOPE• Foreclosure Reported as a sale of home from
1099-A –Must be reported on Schedule D– (May be only 1099-C if foreclosure and debt forgiveness in same
year)
• Cancellation of Debt Reported on Form 982 (if Recourse Debt)– 1099-A, Box 5 is YES
• No Cancellation of Debt if Non-Recourse Debt– 1099-A Box 5 is NO– Selling Price is Full Amount of Debt owed
Possible Gain Due to “Sale” of Property (1099-A)
Foreclosure –Real Property
• Foreclosure –Results in a Sale of Property from debtor to creditor (Form 1099-A)
• May have Capital Gain or Loss– If Personal Residence, No Loss Allowed
• Taxpayer will Receive Form 1099-A from creditor
• May also have Income from Cancelled Debt– Will Receive Form 1099-C
• RECOURSE (Borrower Personally Responsible) - Taxpayer should have Form 1099-A– Box 2 Shows Balance of Debt Outstanding– Box 4 Shows FMV of Property– Lesser Value is Sales Price listed on Sched D
• NON-RECOURSE (will not see ,very rare)
1099-A (example: Hyundai ad )– Box 2 is always Sales Price (Bal of Debt)
Foreclosure –Real Property
CANCELLATION OF DEBT REPORTING - RECOURSE DEBT
• Taxpayer will Receive Form 1099-C– Box 2 Shows Amount of Debt Forgiven.
• Must complete Form 982 and attach to Return– If Foreclosure, Complete only Boxes 1E and 2.– If Ownership retained, also complete Box 10b
• No Income Reported on Line 21, Form 1040
EXAMPLE• Mary Smith purchased her main home in June 2003 for
$175,000. • In 2008 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, 2008 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.
FORM 982
• If Debt Forgiven and Ownership Retained: – Reduce Basis by Amount of Forgiven Debt
FORM 982, LINE 10B
• In Taxwise,– Select Sched D Wksht 2 from Forms List
• 1099-A, Box 1 is Date of Sale• 1099-A, Box 2 or Box 4 is Sale Price (Lesser)
– Complete Wksht 2, “Sale of Your Home” through Ln 14
– Ln 14 value must be entered Manually on Sched D. Does NOT Carry over from Worksheet
Foreclosure –Real Property
FORECLOSUREGAIN WITHIN EXCLUSION
• Sally Jones purchased her main home in June 2003 for $120,000. Due to a Casualty Loss she deducted, her Adjusted Basis in the house is $80,000.
• In 2008 she lost her job and was no longer able to make her payments on this recourse mortgage.
• In July, Sally moved out of the home to live with relatives. • On July 15, 2008 the bank foreclosed on the home and
canceled the remaining amount owed on the home. • The fair market value at the time was $110,000 because
of the poor housing market, Sally still owed $100,000 on the mortgage.
• None of the loan proceeds were used for any purpose other than to buy, build, or substantially improve the principal residence.
Schedule D Reporting of NonRecourse Debt
• To compute the realized gain or loss due to a Foreclosure of a nonrecourse debt, the amount of Debt cancelled is the Sale Price.
• A gain can be offset by Section 121 if the conditions are met for exclusion.
• If loss occurs due to foreclosure of Personal residence, it is a nondeductible loss.
Non Recourse Debt
No Cancellation of Debt if Non-Recourse
*1099-A Box 5 is NO
*No 1099-C issued
* Do not complete form 982
*Selling Price on Schedule D is Box 2 of 1099-A (Full Amount of Debt Cancelled)
Non Recourse Debt George Wilson paid $200,000 for his home.
He borrowed $190,000 from a bank. He is not personally liable for the loan (nonrecourse debt). He pledges the house as security.
Due to lack of payments, the bank foreclosed on the house. The loan balance was $180,000 and the FMV was $170,000.
The amount realized on foreclosure is $180,000 (debt cancelled) and there is no Cancellation of Debt to be reported.