FORECLOSURE

1
FORECLOSURE MORTGAGE DEBT FORGIVENES

• WHAT ARE THEY?
• WHY ARE WE CONCERNED?
• IRS Pub 4702
• IRS Pub 970

2
DEFINITIONS

• Foreclosure Takeover of property by lender
• 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.

3
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

4
DEBT CANCELLATION

• Example Credit Card Debt of 15,000 Borrower
  6 months in arrears Lender accepts 10,000 and
  closes out account.
• Borrower has 5,000 of Income

5
FORM 1099-C
OUT-OF SCOPE
6
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

7
FORM 1099-A
8
Foreclosure Real Property

• Recourse Debt Debtor Responsible for Amount not
  Satisfied by Property
• Possible Income from Cancelled Debt (1099-C)
• Capital Gain Income Possible
• Nonrecourse 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)

9
EXCLUSION CANCELLED DEBT

• Can be Excluded under Special Conditions which
  are OUT-OF-SCOPE
• Bankruptcy
• Insolvency
• Farm or Business Use of Property
• If Excluded, Not Reported on Tax Return

10
EXCLUSION

• Mortgage Forgiveness Debt Relief Act of 2007
  Applies to years 2007 2012
• Defines Additional Exclusion which can be
  IN-SCOPE

11
IN-SCOPE EXCLUSION DEBT RELIEF ACT - 2007

• Cancelled Debt on Principal Residence May be
  Excluded (Forgiven) if
• Debt used to Buy, Build, or Substantially Improve
  Principal Residence
• Debt Incurred to Refinance Debt for above
  purposes
• Debt to Refinance Home can be Excluded Only up to
  Balance of old Mortgage Immediately before
  Refinancing

12
SCREENING

• Use IRS Screening Form to Determine Eligibility
• Screening Sheet For
• Volunteers Assisting Taxpayers with
• Form 1099-C, Cancellation of Debt Personal
  Residence

13
IRS SCREENING SHEET

• STEP 1
• Did the Taxpayer receive a Form 1099-C,
  Cancellation of Debt, from their lender only in
  relation to a home mortgage loan and is the
  information shown on the form correct?
• YES Go to Step 2 NO Go to Step 6
• STEP 2
• Did the taxpayer ever use the home in a trade or
  business or as rental property?
• YES Go to Step 6 NO Go to Step 3
• STEP 3
• Was the debt canceled as a result of a bankruptcy
  case?
• YES Go to Step 6 NO Go to Step 4

14
IRS SCREENING SHEET

• STEP 4
• Ask the following questions to determine if the
  discharged debt is qualified principal residence
  indebtedness
• a. Was the mortgage taken out to buy, build, or
  substantially improve the taxpayers principal
  residence? (NOTE A principal residence is
  generally the home where the taxpayer lives most
  of the time. A taxpayer can have only one
  principal residence at any one time.)
• YES Go to Step 4b NO Go to Step 6
• b. Was the mortgage secured by the taxpayers
  principal residence?
• YES Go to Step 4c NO Go to Step 6

15
IRS SCREENING SHEET

• STEP 4 (cont)
• c. Was any part of the mortgage used to pay off
  credit cards, purchase a car, pay for tuition,
  pay for a vacation, pay medical/dental expenses,
  or used for any other purpose other than to buy,
  build, or substantially improve the principal
  residence?
• YES Go to Step 6 NO Go to Step 4d
• d. Was the mortgage amount more than 2 Million
  (1 Million if married filing separately)?
• YES Go to Step 6 NO Go to Step 5

16
IRS SCREENING SHEET

• STEP 5
• A trained volunteer with an Advanced
  Certification may assist the taxpayer with the
  Form 1099-C at a VITA/TCE Site.
• STEP 6
• These tax issues are outside the scope of the
  volunteer program.

17
CANCELLATION OF DEBT REPORTING

• 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

18
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

19
TAXWISE REPORTING

• If 1099-C for a qualified principal residence
  indebtedness
• Open Form 982 from Forms List
• Check Box 1e Enter Value from 1099-C, Box 2 on
  Line 2.
• If Property NOT Foreclosed,
• Enter 1099-C Box 2 Amount on Line 10 of Form 982

20
FORM 1099-C
50,000.00
07/15/2008
HOME MORTGAGE LOAN
21
FORM 982
22
FORM 982

• If Debt Forgiven and Ownership Retained
• Reduce Basis by Amount of Forgiven Debt
• FORM 982, LINE 10B

23
Foreclosure Real Property

• 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
• NON-RECOURSE
• Box 2 is Sales Price

24
FORM 1099-A
25
Foreclosure Real Property

• 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
• 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

26
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.

27
FORM 1099-A
150,000.00
MARY SMITH
100,000.00
X
1111 LOST DRIVE Your City, YS, ZIP
28
MARY SMITH FORECLOSURE SCHED D, WORKSHEET 2
29
MARY SMITH FORECLOSURECAP GAIN WORKSHEET - LOSS
MUST OVERRIDE to 0
30
MARY SMITH FORECLOSURESCHED D ENTRY LOSS
31
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

32
MARY SMITH FORECLOSURESCHED D, WORKSHEET 2 - GAIN
33
MARY SMITH FORECLOSURENON-TAXABLE GAIN
2ND Entry Required to Record Exclusion - Zero
out Gain
34
MARY SMITH FORECLOSURENON-TAXABLE GAIN
F3 TO GET RED OUT
35
DEBT FORGIVENESS
QUESTIONS?
COMMENTS?