1 NTTC TRAINING 2008 FORECLOSURE& MORTGAGE DEBT FORGIVENES WHAT ARE THEY? WHY ARE WE CONCERNED? IRS Pub 4702 IRS Pub 970

2 NTTC TRAINING 2008 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 NTTC TRAINING 2008 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 NTTC TRAINING 2008  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 DEBT CANCELLATION

5 NTTC TRAINING 2008 FORM 1099-C OUT-OF SCOPE

6 NTTC TRAINING 2008 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 NTTC TRAINING 2008 FORM 1099-A

8 NTTC TRAINING 2008 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 NTTC TRAINING 2008 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 NTTC TRAINING 2008  Mortgage Forgiveness Debt Relief Act of 2007; Applies to years 2007 – 2012  Defines Additional Exclusion which can be “IN-SCOPE” EXCLUSION

11 NTTC TRAINING 2008  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 IN-SCOPE EXCLUSION DEBT RELIEF ACT

12 NTTC TRAINING 2008 SCREENING  Use IRS Screening Form to Determine Eligibility: Screening Sheet For Volunteers Assisting Taxpayers with Form 1099-C, Cancellation of Debt – Personal Residence

13 NTTC TRAINING 2008 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 2NO – 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 6NO – Go to Step 3  STEP 3:  Was the debt canceled as a result of a bankruptcy case?  YES – Go to Step 6NO – Go to Step 4

14 NTTC TRAINING 2008  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 taxpayer’s 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 4bNO – Go to Step 6  b. Was the mortgage secured by the taxpayer’s principal residence?  YES – Go to Step 4cNO – Go to Step 6 IRS SCREENING SHEET

15 NTTC TRAINING 2008  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 6NO – Go to Step 4d  d. Was the mortgage amount more than $2 Million ($1 Million if married filing separately)?  YES – Go to Step 6NO – Go to Step 5 IRS SCREENING SHEET

16 NTTC TRAINING 2008  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. IRS SCREENING SHEET

17 NTTC TRAINING 2008 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 NTTC TRAINING 2008 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 NTTC TRAINING 2008 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 NTTC TRAINING 2008 FORM 1099-C 50, HOME MORTGAGE LOAN 07/15/2008

21 NTTC TRAINING 2008 FORM 982

22 NTTC TRAINING 2008 FORM 982  If Debt Forgiven and Ownership Retained:  Reduce Basis by Amount of Forgiven Debt FORM 982, LINE 10B

23 NTTC TRAINING 2008  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 Foreclosure –Real Property

24 NTTC TRAINING 2008 FORM 1099-A

25 NTTC TRAINING 2008  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 Foreclosure –Real Property

26 NTTC TRAINING 2008 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 NTTC TRAINING 2008 FORM 1099-A MARY SMITH 150, , X 1111 LOST DRIVE Your City, YS, ZIP

28 NTTC TRAINING 2008 MARY SMITH FORECLOSURE SCHED D, WORKSHEET 2

29 NTTC TRAINING 2008 MARY SMITH FORECLOSURE CAP GAIN WORKSHEET - LOSS MUST OVERRIDE to 0

30 NTTC TRAINING 2008 MARY SMITH FORECLOSURE SCHED D ENTRY – LOSS

31 NTTC TRAINING 2008 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

32 NTTC TRAINING 2008 MARY SMITH FORECLOSURE SCHED D, WORKSHEET 2 - GAIN

33 NTTC TRAINING 2008 MARY SMITH FORECLOSURE NON-TAXABLE GAIN 2 ND Entry Required to Record Exclusion -= Zero out Gain

34 NTTC TRAINING 2008 MARY SMITH FORECLOSURE NON-TAXABLE GAIN F3 TO “GET RED OUT

35 NTTC TRAINING 2008 DEBT FORGIVENESS QUESTIONS? COMMENTS?