Financially Distressed Taxpayers

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Financially Distressed Taxpayers

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Financially Distressed TaxpayersCanceled Debts,
Foreclosures, Repossessions, and Abandonments
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Lesson Overview

• Who can be affected by foreclosures
  repossessions?
• What is discharge of indebtedness?
• Foreclosure, Repossessions, and Abandonments
• Nonbusiness credit card debt cancellation
• Personal vehicle repossessions
• Principal residence foreclosure
• Home loan modifications
• Reporting taxable canceled debt

4
Lesson Overview

• Who is an applicable entity
• Student loan debt
• Insolvency exclusions
• Qualified farm indebtedness
• What are tax attributes?
• Qualified real property business indebtedness

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Who Can Be Affected?

• Anyone who has debt and cannot pay in the
  current economic environment
• Affected taxpayers include students
• Homeowners
• Investors
• Small and large business, and others

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Who Can Be Affected?

• 4.2 million homeowners foreclosed since 2007
• Foreclosures expected to rise to 6 million by
  2014
• Banks are not lending and credit is hard to get!

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Who Can Be Affected?

• Foreclosed homeowners can qualify for a home
  loan through a government program (FHA)
• Federal Housing Agency (FHA) loans in 2011 were
  30 compared to 4.5 in 2005
• FHA loans require only 3.5 down payment

8
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the answer to the question below. There will be
two more attendance validation questions later in
this webinar.
Who was just elected NSA President? Steve
Hanson
9
Discharge of Indebtedness

• If you owe a debt which is canceled or forgiven,
  you may incur a tax liability
• Exceptions and exclusions may apply to canceled
  debt
• You may have to reduce tax attributes for any
  debt excluded from gross income

10
Foreclosure or Repossession

• When foreclosed or repossessed property is sold,
  you are treated as having sold the property
• You may have to recognize taxable gain
• Every taxpayer is affected differently review
  the facts and circumstances for each taxpayer

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Foreclosure or Repossession

• Recognizing gain on canceled debt depends on
  whether you are,
• Personally liable for the debt, and if
• The outstanding loan balance is more than the
  Fair Market Value (FMV) of the property

12
Abandonment

• Property is abandoned when you voluntarily and
  permanently give up possession, and
• You intend to end ownership without passing it
  on to anyone else (You do not sell property)

13
Nonbusiness Credit Card Debt Cancellation

• You will receive a 1099-C if canceled debt is
  more than 600
• Canceled debt may become taxable income
• Taxpayer may qualify to exclude debt from income
  if cancellation occurred in a Title 11 Bankruptcy

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Personal Vehicle Repossession

• If your vehicle gets repossessed you should
  determine if you have
• A gain, or
• Nondeductible loss on the disposition

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Main Home Foreclosure or Abandonment

• Main home is considered Principal Residence
• Need to calculate gain or loss on foreclosure
• May qualify for exclusion under Qualified
  Principal Residence Indebtedness rules
• 2 million exclusion for qualifying taxpayers
  MFJ 1 million MFS (to end on 12/31/13)

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Main Home Loan Modification

• Lender agrees to a mortgage loan modification
  known as Workout, which includes principal
  balance reduction of loan
• Taxpayer may qualify for Qualified Principal
  Residence Indebtedness exclusion

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Canceled Debts

• A debt includes any indebtedness
• Which you are personally liable for, or
• Subject to which you hold property
• Personally liable debt is recourse debt
• All other debt is nonrecourse debt

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Nonrecourse Debt

• You do not have ordinary income from
  cancellation of nonrecourse debt, unless
• You retain the collateral and either
• The lender offers a discount for the early
  payment of the debt, or
• The lender agrees to a loan modification that
  results in the reduction of the principal balance
  of the debt

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Nonrecourse Debt

• Must realize the entire amount of unpaid debt
  upon the disposition of the property securing a
  nonrecourse debt
• May realize a gain or loss if outstanding debt
  before disposition is more or less than the
  adjusted basis in the property

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Reporting Taxable Canceled Debt

• Report taxable canceled debt as ordinary income
  on
• Form 1040 Nonbusiness debt
• Schedule C Debt is nonfarm sole proprietorship
• Schedule E Debt is nonfarm rental of real
  property
• Form 4835 Debt related to farm rental activity
  
• Schedule F Debt that is farm debt and you are
  a farmer

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Who Is An Applicable Entity?

• A federal government agency
• A financial institution
• A credit union
• Any organization in a significant trade or
  business of lending money

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Cancellation of Debt

• If an applicable entity cancels or forgives
  debt of 600 or more, a 1099-C will be issued.
• Canceled debt is taxed as ordinary income even
  if you do not receive a 1099-C unless
• An exception or exclusion applies

23
Discounts and Loan Modifications

• If lender offers to reduce the principal loan
  balance if loan is paid off early, or
• Agrees to a loan modification workout which
  includes a reduction in principal loan balance,
• The amount of discount or reduction is cancelled
  debt whether or not you are personally liable
• If your debt is nonrecourse and you dont retain
  the collateral, you do not have cancellation of
  debt

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Foreclosure and Repossession Debt

• Lender may forgive all or part of the debt in
  excess of the FMV of property
• Cancellation of excess debt (Debt FMV) may
  result in Ordinary Income
• Gain or loss on disposition of property is
  calculated as (FMV-Adjusted Basis)
• Character of gain or loss is determined by
  character of property

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Abandonments

• If abandoned property is secured by recourse
  debt, you will realize ordinary income on
  cancelled debt
• You may realize a gain or loss on abandonment of
  property in addition to debt cancellation
• Abandoned property secured by nonrecourse debt
  does not create cancellation of debt income

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Jointly and Severally Liable Debt

• If two individuals are jointly and severally
  liable for cancelled debt, both may get a
  1099-C showing entire amount of canceled debt
• Not both individuals report the entire amount as
  income

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Jointly and Severally Liable Debt

• Amount reportable as income depends on facts and
  circumstances, including
• State law
• The amount of debt proceeds each person received
  
• How much of any interest reduction from debt was
  claimed by each person
• How much of basis of any co-owned property
  bought with debt proceeds was allocated to each
  co-owner
• Whether canceled debt qualifies for any
  exceptions or exclusions

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Gifts

• Typically you do not have income from debt
  cancellation, if
• Cancellation or forgiveness of debt is a gift

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Student Loans

• Certain student loans provide that debt will be
  canceled, if
• Student attends a Qualified educational
  institution, and
• Works for a certain time period in certain
  professions for any of a broad class of employers

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Student Loans

• If a student loan is canceled and meets the
  provisions, canceled debt is not included in
  gross income
• To qualify for this treatment, loan must be made
  by one of the following

31
Student Loans

• Federal government, state or local government
• A tax-exempt public benefit corporation which
  has assumed control of a state, county, or
  municipal hospital, and whose employees are
  considered public employees under state law, or
• An educational institution (part of a program to
  encourage students to serve in occupations or
  areas with unmet needs)

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Student Loans

• Cancellation of student loans made by an
  educational institution for performing services
  for that institution or another organization,
• Must be included in gross income
• Loan must be part of a qualifying program

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Education Loan Repayment Assistance

• Education loan repayments you receive from
  National Health Services Corps Loan Repayment
  Program, or a State Education Loan Repayment
  Program that is
• Eligible for funds under Public Heath Service
  Act,
• Are not taxable if you provide primary health
  services in health professional shortage areas

34
Price Reduced After Purchase

• If seller reduces amount you owe when you are
  not insolvent, and
• Reduction does not occur in a Title 11
  bankruptcy case,
• The reduction does not result in cancellation of
  debt income,
• You must reduce basis in property by amount of
  debt reduced by seller.

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Home Affordable Modification Program

• Any pay-for-performance success payments that
  reduce the principal balance of your home
  mortgage are not taxable
• Payments must be made under the Home Affordable
  Modification Program

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Exclusions for Canceled Debt

• Canceled debt may be excluded from taxable
  income
• If you exclude canceled debt under one of the
  provisions, you must reduce your tax attributes
  which can include
• Certain credits, losses, and basis of assets

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Bankruptcy

• Debt canceled in a Title 11 bankruptcy is not
  included in your income
• Title 11 bankruptcy is a case under Title 11 of
  the U.S. Code (including all Chapters in Title 11
  such as Chapter 7, 11, and 13)
• Debtor must be under court jurisdiction and
  cancellation of debt must be granted by court

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Insolvency

• Canceled debt is not included in income to the
  extent you were insolvent immediately before the
  cancellation
• All of your Liabilities must be more than the
  FMV of all your Assets
• Assets include those that are collateral assets,
  and those which are beyond reach of the creditors
  (retirement accounts)

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Insolvency Exclusion

• Which liabilities are included in insolvency
  calculation?
• Entire amount of recourse debts (personally
  liable debts)
• Amount of nonrecourse debt that is not in excess
  of the FMV of property that is security for the
  debt, and
• The amount of nonrecourse debt in excess of the
  FMV of the property that is forgiven debt

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How to Report Insolvency Exclusion?

• To exclude canceled debt under the insolvency
  exclusion, attach Form 982 to tax return and
• Check Box on line 1B
• Must reduce tax attributes in Part II of Form
  982
• Use Insolvency worksheet to calculate insolvency
  amount

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Example 1 Insolvency More Than Cancelled Debt

• In 2011 Greg was released from personal credit
  card debt of 5,000
• Greg received 1099-C reflecting 5,000 in Box 2
• Total liabilities 15,000 FMV of assets 7,000
• Insolvent by 8,000 (15,000 liabilities -
  7,000 FMV)
• Insolvency is greater than debt - 5,000 debt
  excluded

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Example 2Insolvency Less Than Canceled Debt

• Same facts as Example 1 except for
• Gregs liabilities before the cancellation were
  10,000 FMV of assets were 7,000
• Greg is insolvent to extent of 3,000
• (10,000 liabilities - 7,000 FMV of assets)
• Can exclude only 3,000 of the 5,000 debt
• Include 2,000 of canceled debt as income

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Qualified Farm Indebtedness

• Exclude canceled farm debt if all three apply
• Debt was incurred directly in connection with a
  trade or business of farming
• 50 of more of total gross receipts in 2009,
  2010, and 2011 were from farming business
• The cancellation was made by a Qualified Person

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Who Is A Qualified Person?

• An individual, organization, partnership,
  association, or corporation actively regularly
  engaged in the business of lending money
• Also includes any federal, state, or local
  government agency. U.S. Dept of Agriculture is a
  qualified person
• Qualified person cant be related to you, cant
  be the person you acquired the property from or
  anyone related to this person

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Qualified Farm Indebtedness

• If Qualified Farm Debt is canceled in a Title 11
  bankruptcy, you must apply the bankruptcy
  exclusion
• Do not apply the exclusion for Qualified Farm
  Debt
• If Insolvent before debt cancellation apply
  Insolvency exclusion not Qualified Farm Debt
  exclusion

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Qualified Farm Debt Exclusion

• Amount of Qualified Farm Debt that can be
  excluded is limited. It cannot be more than the
  sum of
• Your adjusted tax attributes, and
• Total adjusted basis of Qualified Property
  held at the beginning of 2013 (any property held
  or used in your trade or business or for
  production of income)
• Any canceled qualified farm debt above this
  limit must be included as income

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Adjusted Tax Attributes

• Adjusted tax attributes is the sum of the
  following 4 items
• Any net operating loss for 2012 and any NOL
  carryover to 2012
• Any net capital loss for 2012 and any capital
  loss carryover to 2012
• Any passive activity loss carryover from 2012

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Adjusted Tax Attributes

• Three times the sum of any
• General business credit carryover to or from 2012
• Minimum tax credit available as of the beginning
  of 2013
• Foreign tax credit carryover to or from 2012
• Passive activity credit carryover from 2012

49
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How To Report Qualified Farm Indebtedness
Exclusion

• Check the box on line 1c of Form 982
• On line 2 of Form 982 include amount of
  qualified farm debt canceled, but not more than
  exclusion limit
• Must also reduce the tax attributes in Part II
  of Form 982

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Example 3 Chucks Farming Debt

• Chuck released from 10,000 of debt incurred
  directly in connection with his farming business
• Received 1099-C showing 10,000 in Box 2
• For 2009, 2010, 2011 at least 50 of total gross
  receipts were from farming trade or business
• Adjusted tax attributes are 5,000 Adjusted
  basis in qualified property is 3,000

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Example 3 (Cont) Chucks Farming Debt

• Does Chuck qualify to exclude canceled debt
  under the Qualified Farm Indebtedness exclusion?
• If so, how much can he exclude?
• What do you recommend to Chuck as his tax
  professional?

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Example 3 (Cont) Chucks Farming Debt

• Chuck can exclude 8,000 of the 10,000 of
  canceled farm debt
• 5,000 adjusted tax attributes 3,000 total
  adjusted basis in Qualified Property at the
  beginning of 2012
• Chuck must include 2,000 of canceled debt as
  income

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Qualified Real Property Business Indebtedness

• Can exclude canceled qualified real property
  business debt from income if the following 4
  conditions are met
• Debt incurred or assumed in connection with real
  property used in trade or business
• Debt is secured by the real property

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Qualified Real Property Business Indebtedness

• Debt incurred or assumed
• Before 1993, or
• After 1992 if debt is either Qualified
  Acquisition Indebtedness, or debt incurred to
  refinance qualified real property business debt
  incurred or assumed before 1993 (cannot exceed
  original acquisition debt amount)
• You elect to apply these rules to the debt

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What Is Qualified Acquisition Indebtedness?

• Debt incurred or assumed to acquire, construct,
  reconstruct, or substantially improve real
  property that is used in a trade or business and
  secures the debt, or
• Debt resulting from the refinancing of qualified
  acquisition indebtedness, to extent amount of
  debt doesnt exceed amount of debt refinanced

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Qualified Real Property Business Indebtedness

• If Qualified real property business debt is
  canceled in Title 11 bankruptcy case you must
  apply bankruptcy exclusion
• If insolvent immediately before cancellation of
  business debt, you must apply insolvency
  exclusion before applying exclusion for Qualified
  real property business debt

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Electing The Qualified Real Property Business
Debt Exclusion

• An Election must be made to exclude canceled
  Qualified real property business debt from income
• Election must be made on a timely filed tax
  return (including extensions). May only be
  revoked with IRS consent
• Make Election using Form 982. Attach to tax
  return and check Box on line 1d.
• Include canceled debt amount on line 2 of Form
  982. Reduce tax attributes in Part II of Form 982

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Electing The Qualified Real Property Business
Debt Exclusion

• If you forgot to make election you are still
  eligible
• File an amended return within 6 months of the
  due date of the return (excluding extensions)
• Enter Filed Pursuant to Section 301.9100-2 on
  the amended return

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Qualified Principal Residence Indebtedness

• You can exclude canceled debt if it is Qualified
  Principal Residence Indebtedness
• What is Qualified Principal Residence
  Indebtedness?
• Does everyone qualify for this exclusion?

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Qualified Principal Residence Indebtedness

• Qualified Principal Residence Indebtedness is
  any mortgage taken out to buy, build, or
  substantially improve your Main home
• Also includes any debt secured by your main home
  that was used to refinance a mortgage taken out
  to buy, build, or substantially improve your main
  home
• Amount cannot exceed old mortgage principal
  balance just before refinancing (NO Cash Out
  Loans)

62
Example 4Beckys Qualified Principal Residence
Debt

• In 2005 Becky bought a Main home - 315,000
• Took out new mortgage loan for 300,000
• Took out 2nd mortgage loan for 50,000 at a
  later time to add a garage to her home
• In 2012 her mortgage loan balance was 325,000
  for 1st 2nd mortgage loans

63
Example 4Beckys Qualified Principal Residence
Debt

• Becky refinanced the two mortgage loans of
  325,000 into one loan for 400,000
• FMV of her home at refinance was 430,000
• She used additional 75,000 from refinance loan
  to pay off credit card debt and college tuition
  for her daughter

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Example 4Beckys Qualified Principal Residence
Debt

• How much is Beckys Qualified Principal
  Residence Indebtedness after the refinancing?
• What questions or documentation would you ask
  for when your new client Becky comes to your
  office for her 2012 tax return preparation?

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What Kind of Property Qualifies for a Main Home?

• A main home is the home where you ordinarily
  live most of the time
• You can only have one main home at any one time

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What Kind of Property Qualifies for a Main Home?

• John Poor and Rhonda Poor have 2 homes within 5
  miles of each other.
• The second home was purchased as a foreclosure
  and it was such a great deal the Poors couldnt
  pass it up!
• Every 2 weeks the Poors get in an argument and
  Mr. Poor lives in the 2nd home for 7 days
• Do both homes qualify as a main home?

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Principal Residence Exclusion Limit

• Maximum amount of debt you can treat as
  Qualified Principal Residence Indebtedness is 2
  million or 1 million if married filing separate
• Expired on 12/31/12 but extended to 12/31/13
  under the Fiscal Cliff Bill passed early January
  2013
• Cannot exclude canceled debt if cancellation was
  for services performed for the lender, or for any
  other factor not directly related to a decline in
  value of your home or due to your financial
  condition

68
Principal Residence Exclusion Ordering Rule

• If only part of a loan is Qualified Principal
  Residence Indebtedness, the exclusion applies
  only to extent the amount canceled is more than
  the amount of the loan that is NOT Qualified
  Principal Residence Indebtedness
• The remaining part of the loan may qualify for
  another exclusion

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Example 5Kens Principal Qualified Residence Debt

• Ken incurred recourse debt of 800,000 when he
  purchased his main home for 880,000
• Ken refinanced for 850,000 when FMV of home was
  1 million
• At time of refinancing the principal loan
  balance was 740,000
• Ken used 110,000 from refinance to pay off
  credit cards and buy a New Porsche

70
Example 5Kens Principal Qualified Residence Debt

• 2 years after refinancing Ken lost his job
• He did a short sale of the property for 735,000
• FMV of home was between 700,000 - 750,000
• Lender canceled remaining 115,000 of debt
• How much of the 115,000 canceled debt can Ken
  exclude as Qualified Principal Residence
  Indebtedness?

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Example 5Kens Principal Qualified Residence Debt

• Ken can only exclude 5,000 of the canceled debt
  
• Ken must include 110,000 of canceled debt as
  income (unless another exclusion applies)
• 115,000 canceled debt - 110,000 debt that
  wasnt Qualified Principal Residence Indebtedness

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How To Report Qualified Principal Residence
Indebtedness Exclusion

• Attach Form 982 to your tax return and check Box
  1e
• On line 2 of Form 982 include the amount of
  canceled Qualified Principal Residence
  Indebtedness, but not more than exclusion limit
• If you continue to own the home you must reduce
  your basis in the home

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Reduction of Tax Attributes Qualified Principal
Residence Indebtedness

• Reduce the basis of your home by amount of
  canceled Qualified Principal Residence
  Indebtedness excluded from income, if you
• Continue to own the home after the cancellation
  of debt
• Enter amount of basis reduction on Form 982 line
  10b

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Bankruptcy and InsolvencyNo Tax Attributes Other
Than Basis of Personal-Use Property

• If you exclude canceled debt other than
  Qualified Principal Residence Indebtedness and
  you have no tax attributes besides the adjusted
  basis of personal-use property, then
• You must reduce the basis of the personal-use
  property you held at the beginning of 2013 (in
  proration to adjusted basis)
• Personal-use property is any property not used
  in a trade or business nor held for investment
  purposes

75
Bankruptcy and Insolvency All Other Tax Attributes

• If canceled debt is excluded using bankruptcy or
  insolvency exclusions, you must reduce the
  following tax attributes by amount of excluded
  debt
• Net Operating Loss Reduce any 2012 NOL first,
  then any NOL carryover to 2011. (Reduce 1 for
  ever 1 of excluded debt)
• General Business Credit Reduce credit
  carryover to or from 2012. (Reduce the carryover
  by 33 1/3 cents for ever 1 of excluded debt)

76
Bankruptcy and Insolvency All Other Tax Attributes

• Minimum Tax Credit Reduce minimum tax credit
  available at beginning of 2013. (Reduce credit by
  33 1/3 cents for every 1 of excluded canceled
  debt)
• Capital Loss Reduce first any 2012 net
  capital loss, then capital loss carryover to 2012
  (Reduce capital loss or carryover by 1 for every
  1 of excluded canceled debt)

77
Bankruptcy and Insolvency All Other Tax Attributes

• Basis Reduce basis of property held at
  beginning of 2013 (in proportion to adjusted
  basis) in the following order
• Real Property used in trade or business or held
  for investment that secured canceled debt
• B. Personal Property used in trade or business
  or held for investment that secured canceled
  debt
• C. Other Property used in trade or business or
  held for investment

78
Bankruptcy and Insolvency All Other Tax Attributes

• Inventory, accounts receivable, notes receivable,
  or real property held primarily for sale to
  customers
• E. Personal-use property (not used in trade or
  business and not held for investment)
• Passive Activity Loss and Credit Carryovers
  Reduce passive activity loss and credit
  carryovers from 2012 (Reduce loss carryover by 1
  for every 1 dollar of excluded debt, Reduce
  Credit Carryover by 33 1/3 cents for every dollar
  of excluded debt)

79
Bankruptcy and Insolvency All Other Tax Attributes

• Foreign Tax Credit Reduce credit carryover to
  or from 2012. (Reduce credit carryover by 33 1/3
  cents for every 1 dollar of excluded debt)
• An election can be made to reduce basis of
  depreciable property before reducing other tax
  attributes
• If amount of canceled debt excluded is more than
  total basis of depreciable property, then reduce
  the other tax attributes with the excess debt
  remaining

80
Bankruptcy and Insolvency Recapture of Basis
Reductions

• If basis of property is reduced under these
  provisions, and you later sell or otherwise
  dispose of property at a gain
• The part of the gain due to this basis reduction
  is taxable as ordinary income under depreciation
  recapture provisions
• Treat any Non Section 1245 or Section 1250
  property as Section 1245 property

81
Qualified Farm Indebtedness

• If debt is excluded under both insolvency
  exclusion and Qualified Farm Indebtedness
  exclusion, you
• First reduce your tax attributes by the amount
  excluded under the insolvency exclusion
• Next reduce your remaining tax attributes by
  amount of canceled debt qualifying for farm debt
  exclusion
• Reduce tax attributes in same order explained
  under Bankruptcy and Insolvency rules

82
Qualified Farm Indebtedness

• Reduce only the basis of Qualified Property
  (property used or held for use in a trade or
  business, or for production of income) in
  following order
• Depreciable qualified property
• 2) Land that is qualified property and is used or
  held for use in your farming business
• 3) Other qualified property

83
Qualified Real Property Business Indebtedness

• If you elect to exclude canceled Qualified Real
  Property Business debt, you must
• Reduce the basis of your depreciable real
  property by amount of canceled Qualified Real
  Property Business debt excluded from income
• Enter amount of basis reduction on Form 982 line
  4

84
Foreclosures and Repossessions

• Foreclosures and Repossessions are treated as
  sales
• You may realize a gain or loss from transaction
  even if you voluntarily return the property
• If outstanding loan balance is more than FMV of
  property, and lender cancels all or part of loan
  balance, you
• May realize ordinary income from cancellation of
  debt

85
Foreclosures and Repossessions Gain or Loss

• Figure and report gain or loss in the same way
  as a regular sale
• Gain Amount Realized Adjusted Basis
• Loss Adjusted Basis Amount Realized

86
Foreclosures and RepossessionsAmount Realized
and Ordinary Income on Recourse Debt

• If personally liable for debt, the amount
  realized on the foreclosure or repossession
  includes the Smaller of
• Outstanding debt immediately before the transfer
  reduced by any amount for which you remain
  personally liable immediately after transfer, or
• B. The FMV of the transferred property

87
Example 6Lilis Recourse Debt Foreclosure

• Lili paid 200,000 for her home
• Borrowed 185,000 from the bank
• Lili is personally liable for the loan
  (recourse)
• Upon foreclosure balance due was 180,000 FMV
  of home was 170,000
• Adjusted basis was 175,000 due to casualty loss
  
• Bank forgave 2,000 of the 10,000 debt that was
  in excess of FMV (180,000-170,000)

88
Example 6Lilis Recourse Debt Foreclosure

• Lili remains personally liable for 8,000
  balance
• How much ordinary income does Lili have from the
  cancellation of debt?
• What is Lilis Gain or Loss from foreclosure?
• Can Lili exclude any of the canceled debt?

89
Example 6Lilis Recourse Debt Foreclosure

• Lili has ordinary income of 2,000 from
  cancellation of debt
• (170,000 FMV - 172,000 outstanding debt before
  foreclosure less amount she remains personally
  liable for 8,000) (180,000-8,000)
• Lili can exclude 2,000 of canceled debt under
  the Qualified Principal Residence Indebtedness
• She has a 5,000 Nondeductible loss
  (170,000 realized - 175,000
  Adjusted Basis)

90
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91
Amount Realized on a Nonrecourse Debt

• The amount you realize a on nonrecourse debt
  includes
• The full amount of the outstanding debt
  immediately before the transfer
• This holds even if the FMV of property is less
  than the outstanding debt before the transfer

92
Abandonments

• Abandonment occurs when you voluntarily and
  permanently give up possession and use of the
  property, but
• You dont pass it on to anyone else (No Sale)
• A Voluntary conveyance of the property in lieu
  of foreclosure (Deed in Lieu of Foreclosure) is
  not an abandonment.
• It is treated as an exchange of property to
  satisfy debt

93
Abandonments Tax Consequences

• Tax consequences of an abandonment of property
  depends on whether the loan is
• Recourse (Personally liable), or
• Nonrecourse (Not personally liable)

94
Abandonment of Property Securing Recourse Debt

• If you abandon property that secures debt for
  which you are personally liable, you do not have
  gain or loss until the foreclosure is completed

95
Abandonment of Property Securing Nonrecourse Debt

• If you abandon property that secures debt for
  which you are not personally liable (nonrecourse)
  debt, the abandonment is treated as a sale or
  exchange
• Amount realized on the abandonment of property
  is the amount of the nonrecourse debt

96
Abandonment of Property Securing Nonrecourse Debt

• If amount realized is more than the adjusted
  basis, you have a gain
• If adjusted basis is more than amount realized,
  you have a loss
• Loss from abandonment of business or investment
  property is a deductible loss
• Character of the loss depends on character of
  the property Cannot deduct loss for personal use
  property

97
Abandonment Canceled Debt

• If abandoned property is secured by debt that
  you are personally liable for, and debt is
  canceled
• You will realize ordinary income equal to the
  canceled debt, and
• You will realize gain or loss from abandonment

98
Thank you for participating in this
webinar.Below is the link to the online survey
and CPE quiz
http//webinars.nsacct.org/postevent.php?id10804
Use your password for this webinar that is in
your email confirmation. You must complete this
survey and the quiz or final exam (for the
recorded version) to qualify to receive CPE
credit. National Society of Accountants 1010
North Fairfax Street Alexandria, VA
22314-1574 Phone  [phone] members_at_nsacct.o
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