1 NTTC TRAINING 2009 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

2 NTTC 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

3 NTTC TRAINING 2009 FORECLOSURE REAL 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)

4 NTTC 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

5 NTTC 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

6 NTTC 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

7 NTTC 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

8 NTTC TRAINING 2009 FORM 1099-C

9 NTTC 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

10 NTTC 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

11 NTTC TRAINING 2009 FORM 1099-A

12 NTTC 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

13 NTTC TRAINING 2009 FORM 982 Lines 1e & 2

14 NTTC TRAINING 2009 FORM 982 Line 10b  Partial mortgage debt forgiven and ownership retained:  Reduce basis by amount of debt forgiven

15 NTTC TRAINING 2009 MORTGAGE DEBT FORGIVENESS RELIEF ACT QUESTIONS? COMMENTS?