mortgage debt forgiveness relief act

1NOV 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


DEFINTIONS


Definitions(continued)


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


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


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


FORM 1099-C


FORM 1099-A


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


NY STATE

One action state; Lender must choose:

(1) Foreclosing on property (2) Sue to collect debt


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)


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 !!!!!


Exclusions Eliminate Income

Discharge of qualified principal indebtedness

Other areas OUT of SCOPE


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


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


SCREENING SHEET for 1099-C


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


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


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


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


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?


Tom & Grace Part I Form 982


TOM & GRACE Form 982 Part II 10b


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)


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


SCH D Elements


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


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.


FORM 1099-A

MARY SMITH

150,000.00

100,000.00

X

1111 LOST DRIVEYour City, YS, ZIP


MARY SMITH FORECLOSURESCHED D, WORKSHEET 2


MARY SMITH FORECLOSURECAP GAIN WORKSHEET - LOSS

MUST OVERRIDE to 0


MARY SMITH FORECLOSURESCHED D ENTRY – LOSS

SCH D must be filed with return


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


MARY SMITH FORECLOSURESCHED D, WORKSHEET 2 - GAIN


MARY SMITH FORECLOSURENON-TAXABLE GAIN

F3 TO “GET RED OUT

40NTTC TRAINING 2009

MARY SMITH FORECLOSURENON-TAXABLE GAIN

2ND Entry Required to Record Exclusion -= Zero out Gain

SCH D must be filed


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)



QUESTIONS?

COMMENTS?

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mortgage debt forgiveness relief act

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