1NTTC TRAINING 2009

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

2NTTC TRAINING 2009

FORECLOSURE & MORTGAGE DEBT REDUCTION

Foreclosure: Takeover of property by lender – Homeowner loses home and moves out

Debt Reduction: Reduction in mortgage indebtedness from renegotiation – Homeowner keeps possession

3NTTC TRAINING 2009

FORECLOSUREREAL PROPERTY

Recourse Debt – Debtor responsible for amount not satisfied by property Debt forgiveness income (1099-C) 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)

4NTTC TRAINING 2009

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-OUT OF SCOPE-STOP

5NTTC TRAINING 2009

DEBT REDUCTION OR FORECLOSURE

Debt reduction Use slides 6, 7, 8 Taxpayer has Form 1099-C Complete Form 982

Foreclosure Use slides 9, 10, 11 Taxpayer has Form 1099-C or 1099-A Complete Form 982 and Sch D Wkt

6NTTC TRAINING 2009

MORTGAGE DEBT REDUCTION HOMEOWNER

KEEPS POSSESSION Taxpayer/homeowner retains ownership

Mortgage debt is reduced-partially forgiven

Taxpayer receives Form 1099-C

Complete Form 982

No taxable gain or loss

Basis (cost) of home-Taxpayers cost is reduced

Most mortgages are non-recourse debt

7NTTC TRAINING 2009

DEBT REDUCTION REPORTING

Taxpayer should have Form 1099-C Box 2 shows amount of debt forgiven.

Data entered directly on Form 982

Must complete Form 982 and attach to return Complete Boxes 1e and 2. Complete Box 10b to reduce taxpayer’s cost basis

No income reported on 1040 Line 21

8NTTC TRAINING 2009

FORM 1099-C

9NTTC TRAINING 2009

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

Recourse debt is unlikely-most mortgages are non-recourse

10NTTC TRAINING 2009

Foreclosure satisfies debt (Non-Recourse) Box 2 is Sales Price to Sch D Wkt Complete sale and acquisition date on Sch D

Wkt

Borrower Personally Responsible beyond mortgage (Recourse, very unlikely) Box 2 Balance of Debt Box Outstanding Box 4 FMV of Property Lesser Value is Sales Price to Schedule D

Wkt

FORECLOSURE –HOMEOWNER LOSES POSSESSION

Form 1099-A

11NTTC TRAINING 2009

FORM 1099-A

12NTTC TRAINING 2009

CANCELLATION OF DEBT REPORTING

Taxpayer should have Form 1099-C or 1099-A 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 1040 Line 21

13NTTC TRAINING 2009

FORM 982Lines 1e & 2

14NTTC TRAINING 2009

FORM 982 Line 10b

Partial mortgage debt forgiven and ownership retained: Reduce basis by amount of debt forgiven

15NTTC TRAINING 2009

MORTGAGE DEBT FORGIVENESS RELIEF ACT

QUESTIONS?

COMMENTS?