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					   MORTGAGE DEBT
FORGIVENESS RELIEF ACT




   NOV 2010 ALABANY IT from Ulster   1
         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

           NOV 2010 ALABANY IT from Ulster   2
DEFINTIONS




       NOV 2010 ALABANY IT from Ulster   3
Definitions(continued)




      NOV 2010 ALABANY IT from Ulster   4
          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
            NOV 2010 ALABANY IT from Ulster   5
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


                 NOV 2010 ALABANY IT from Ulster         6
        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




              NOV 2010 ALABANY IT from Ulster   7
FORM 1099-C




NOV 2010 ALABANY IT from Ulster   8
FORM 1099-A




       NOV 2010 ALABANY IT from Ulster   9
                 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




              NOV 2010 ALABANY IT from Ulster   10
               NY STATE
 One action state; Lender must choose:

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




            NOV 2010 ALABANY IT from Ulster   11
         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)

              NOV 2010 ALABANY IT from Ulster     12
       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 !!!!!


                 NOV 2010 ALABANY IT from Ulster             13
 Exclusions Eliminate Income
 Discharge of qualified principal
  indebtedness

 Other areas OUT of SCOPE




               NOV 2010 ALABANY IT from Ulster   14
 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


             NOV 2010 ALABANY IT from Ulster   15
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


                 NOV 2010 ALABANY IT from Ulster           16
SCREENING SHEET for 1099-C




     NOV 2010 ALABANY IT from Ulster   17
SCREENING SHEET for 1099-C




     NOV 2010 ALABANY IT from Ulster   18
SCREENING SHEET for 1099-C




     NOV 2010 ALABANY IT from Ulster   19
SCREENING SHEET for 1099-C




     NOV 2010 ALABANY IT from Ulster   20
      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




              NOV 2010 ALABANY IT from Ulster   21
         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



                 NOV 2010 ALABANY IT from Ulster                22
         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


                NOV 2010 ALABANY IT from Ulster           23
    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


          NOV 2010 ALABANY IT from Ulster   24
           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?

               NOV 2010 ALABANY IT from Ulster          25
Tom & Grace Part I Form
         982




   NOV 2010 ALABANY IT from Ulster   26
TOM & GRACE Form 982
     Part II 10b




  NOV 2010 ALABANY IT from Ulster   27
                 FORECLOSURE
                REAL 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)


              NOV 2010 ALABANY IT from Ulster      28
          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




              NOV 2010 ALABANY IT from Ulster      29
  SCH D Elements




NOV 2010 ALABANY IT from Ulster   30
                  SCHEDULE D
                  RECOURSE          NON-
                                    RECOURSE
   Form 1099-A    BOX 5             BOX 5 BLANK
                  CHECKED
   SALES PRICE    Lesser of BOX 2 BOX 2
                  or BOX 4


   Form 1099-C    BOX 5             BOX 5 BLANK
                  CHECKED
   SALES PRICE    BOX 7             BOX 7



VERIFY ELEMENTS WHEN BOTH FORMS EXIST
            NOV 2010 ALABANY IT from Ulster       31
                       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.

               NOV 2010 ALABANY IT from Ulster         32
FORM 1099-A



                                          150,000.00
  MARY SMITH
                                         100,000.00

                                             X
                                  1111 LOST DRIVE
                                  Your City, YS, ZIP




               NOV 2010 ALABANY IT from Ulster         33
MARY SMITH FORECLOSURE
SCHED D, WORKSHEET 2




  NOV 2010 ALABANY IT from Ulster   34
MARY SMITH FORECLOSURE
CAP GAIN WORKSHEET - LOSS

                 MUST OVERRIDE to 0




     NOV 2010 ALABANY IT from Ulster   35
   MARY SMITH FORECLOSURE
   SCHED D ENTRY – LOSS




SCH D must be filed with return

               NOV 2010 ALABANY IT from Ulster   36
    EXAMPLE 2: FORECLOSURE
    GAIN WITHIN EXCLUSION

 Mary Smith purchased her main home in
  June 2003 for $175,000. (From 1st
  Example)

 Change purchase price to $80,000




           NOV 2010 ALABANY IT from Ulster   37
MARY SMITH FORECLOSURE
SCHED D, WORKSHEET 2 - GAIN




           NOV 2010 ALABANY IT from Ulster   38
MARY SMITH FORECLOSURE
NON-TAXABLE GAIN
        F3 TO “GET RED OUT




         NOV 2010 ALABANY IT from Ulster   39
  MARY SMITH FORECLOSURE
  NON-TAXABLE GAIN




SCH D must be filed
        2ND Entry Required to Record Exclusion -= Zero out Gain

                                                                  40
                          NTTC TRAINING 2009
   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)

           NOV 2010 ALABANY IT from Ulster   41
MORTGAGE DEBT FORGIVENESS
       RELIEF ACT



  QUESTIONS?



                           COMMENTS?
Like a duck upon the sea serenely paddling unaware
of the fathomless depths below

              NOV 2010 ALABANY IT from Ulster        42

				
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