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					Handling Debt Forgiveness andMortgage Foreclosure
         Handling Debt Forgiveness andMortgage Foreclosure
                                                    AARP Tax Aide
                                             Handling Mortgage Foreclosure


    1.    If Tp receives form 1099-A (Acquisition or Abandonment of Secured Property), a Schedule D, Capital Gains or
          Losses will be required, as follows:
          a. In Tax Wise, report gain/loss using “Sch D wkt 2” by completing lines 1 through 14 in the bottom
             section of the form for “selling your home”,
           b. Use lesser of Box 2 or 4 from the 1099-A as selling price:
           c. TP must furnish cost basis;
           d. Remember TP may be eligible for the exclusion of sale of main home. If TP is eligible for the Section
              121 exclusion (i.e. $250,000 if single or HOH, or $500,000 if joint), in Tax Wise the “Sch D wkt 2”
              will show this amount based on the TP”s filing status;
           e. If there is a taxable gain or no gain, you must complete Schedule D of the sale (foreclosure) of the
              home, reflecting the gain. Note” in Tax Wise you link to the “Capital Gains or Losses Worksheet”
              to enter the sale of home transaction, for example as follows:


Description                  Date of
                                                    Date of Sale        Sale Price             Cost            Gain \ (Loss)
                             Purchase
Foreclosure of Home          MM/DD/YYYY          MM/DD/YYYY              250,000             200,000              50,000
Sect 121 Exclusion           MM/DD/YYYY          MM/DD/YYYY                 0                 50,000             (50,000)



          Note: The above assumes the home was foreclosed on by the mortgage company, and the sales price was
                the lesser of the cancelled debt or fair market value of the residence, (i.e. taken off of the 1099-A
                 Or 1099-C). It also assumes the taxpayer’s cost in the residence is only $200,000 and qualifies
                 For a section 121 exclusion of the gain. You will have to “F3” the sales field on Schedule D to get
                 the “red” out.

          f. If there is a loss, a Schedule D is prepared but with a zero gain (i.e. no loss can be taken on the sale of
             a personal residence). In order to have a “zero” gain or loss in column f of Schedule D, you will have
             to use the override (F8” key) on Schedule D. Complete the Cap Gains or Losses Worksheet, as follows:


Description                  Date of
                                                    Date of Sale        Sale Price             Cost            Gain \ (Loss)
                             Purchase
Foreclosure of Home          MM/DD/YYYY          MM/DD/YYYY              250,000             300,000                 0*

* Note the above loss
may not be less than 0.



Note: the above assumes the home was foreclosed on by the mortgage company, and the $250,000 sales
price (i.e. the lesser of the cancelled debt or fair market value of the residence taken off of the 1099-A or
1099-C) was less than the TP’s cost of $300,000. You will have to (“F-8”) the gain/loss field on Schedule
D to zero out the loss.
     Handling Debt Forgiveness andMortgage Foreclosure


                                             Debt Forgiveness


   If TP receives a 1099-C (Cancellation of Debt):
       a. Ask the TP the following questions (refer to screening toll provided by the IRS):
               i.     Was the mortgage used for anything other than to buy, build or substantially
                      improve the TP’s principle residence?
               ii.    Was someone other than the TP liable for the debt?
               iii.   Was the mortgage amount more than $2m ($1 m if MFS)?
               iv.    Was the home ever used for business or rental?
               v.     Was the debt cancelled due to bankruptcy?
       b. If any answer is “yes” the return is out-of-scope. If not, proceed as follows:


                The Mortgage Forgiveness Debt Relief Act of 2007 allows individuals to
        exclude from gross Income any discharges of qualified principal residence indebtedness.
        This exclusion applies to Discharges made after 2006 and before 2010. Additionally, the
        basis of the principal residence Must be reduced (but not below zero) by the amount
        excluded from gross income. Form 982, Reduction of Tax Attributed Due to Discharge
        of Indebtedness (and Section 1082 Basis Adjustment), is used to report the exclusion
        amount and the reduction to basis of the principal Residence. If the residence was
        disposed of, the taxpayer may also be required to recognize a Gain on its disposition,
        though the exclusion of gain from the sale of a principal residence under IRC section
        121 would generally apply to any such gain.


Open Form 982 (Reduction of Tax Attributes) from the Forms List and complete lines 1e, 2, and, if
ownership is retained by the TP, also line 10b. The 1099-C box 2 amount should be entered on line 2, and
if applicable, Line 10b. (See Form 982 next page

If the TP has not received 1099-A but only a 1099-C from the mortgage company reflecting they have
foreclosed and forgiven the debt (i.e. this happens if the debt forgiveness is processed in the same year as
the foreclosure) report the sale of home using step 1 above (i.e. follow the steps in item 1 above but use
the lesser of the 1099-C box 2 or box 7 as the selling price).




If the discharged debt excluded is “qualified principal residence indebtedness” the volunteer
Should complete the applicable lines on Form 982 and file it with the taxpayer’s return.
    Handling Debt Forgiveness andMortgage Foreclosure




Do I have to completely fill out Form 982?

NO ! As a volunteer you only need to mark line 1(e) and complete line 2 and if there is a
mortgage modification or work out and you retain the principle residence line 10 (b), all
other information is (OUT OF SCOPE)

				
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posted:11/24/2011
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