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

2 NOV 2010 ALABANY IT from Ulster MORTGAGE DEBT FORGIVENESS RELIEF ACT  Enacted in 2007 and expires end of  Allows taxpayers to exclude from income certain cancelled debt on their principal residence  May be eligible for exclusion of gain upon sale

3 NOV 2010 ALABANY IT from Ulster DEFINTIONS

4 NOV 2010 ALABANY IT from Ulster Definitions(continued)

5 NOV 2010 ALABANY IT from Ulster 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

6 NOV 2010 ALABANY IT from Ulster 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

7 NOV 2010 ALABANY IT from Ulster 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

8 NOV 2010 ALABANY IT from Ulster FORM 1099-C

9 NOV 2010 ALABANY IT from Ulster FORM 1099-A

10 NOV 2010 ALABANY IT from Ulster 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

11 NOV 2010 ALABANY IT from Ulster NY STATE  One action state; Lender must choose:  (1) Foreclosing on property  (2) Sue to collect debt

12 NOV 2010 ALABANY IT from Ulster 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)

13 NOV 2010 ALABANY IT from Ulster 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 !!!!!

14 NOV 2010 ALABANY IT from Ulster Exclusions Eliminate Income  Discharge of qualified principal indebtedness  Other areas OUT of SCOPE

15 NOV 2010 ALABANY IT from Ulster 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

16 NOV 2010 ALABANY IT from Ulster 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

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

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

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

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

21 NOV 2010 ALABANY IT from Ulster 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

22 NOV 2010 ALABANY IT from Ulster 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

23 NOV 2010 ALABANY IT from Ulster 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

24 NOV 2010 ALABANY IT from Ulster 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

25 NOV 2010 ALABANY IT from Ulster 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?

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

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

28 NOV 2010 ALABANY IT from Ulster 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)

29 NOV 2010 ALABANY IT from Ulster 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

30 NOV 2010 ALABANY IT from Ulster SCH D Elements

31 NOV 2010 ALABANY IT from Ulster SCHEDULE D RECOURSENON- RECOURSE Form 1099-ABOX 5 CHECKED BOX 5 BLANK SALES PRICELesser of BOX 2 or BOX 4 BOX 2 Form 1099-CBOX 5 CHECKED BOX 5 BLANK SALES PRICEBOX 7 VERIFY ELEMENTS WHEN BOTH FORMS EXIST

32 NOV 2010 ALABANY IT from Ulster 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.

33 NOV 2010 ALABANY IT from Ulster FORM 1099-A MARY SMITH 150, , X 1111 LOST DRIVE Your City, YS, ZIP

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

35 NOV 2010 ALABANY IT from Ulster MARY SMITH FORECLOSURE CAP GAIN WORKSHEET - LOSS MUST OVERRIDE to 0

36 NOV 2010 ALABANY IT from Ulster MARY SMITH FORECLOSURE SCHED D ENTRY – LOSS SCH D must be filed with return

37 NOV 2010 ALABANY IT from Ulster EXAMPLE 2: FORECLOSURE GAIN WITHIN EXCLUSION  Mary Smith purchased her main home in June 2003 for $175,000. (From 1 st Example)  Change purchase price to $80,000

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

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

40 NTTC TRAINING 2009 MARY SMITH FORECLOSURE NON-TAXABLE GAIN 2 ND Entry Required to Record Exclusion -= Zero out Gain SCH D must be filed

41 NOV 2010 ALABANY IT from Ulster 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)

42 NOV 2010 ALABANY IT from Ulster MORTGAGE DEBT FORGIVENESS RELIEF ACT QUESTIONS? COMMENTS? Like a duck upon the sea serenely paddling unaware of the fathomless depths below