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

2. 2 NOV 2010 ALABANY IT from Ulster 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  May be eligible for exclusion of gain upon sale

3. 3 NOV 2010 ALABANY IT from Ulster DEFINTIONS

4. 4 NOV 2010 ALABANY IT from Ulster Definitions(continued)

5. 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. 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. 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. 8 NOV 2010 ALABANY IT from Ulster FORM 1099-C

9. 9 NOV 2010 ALABANY IT from Ulster FORM 1099-A

10. 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. 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. 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. 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. 14 NOV 2010 ALABANY IT from Ulster Exclusions Eliminate Income  Discharge of qualified principal indebtedness  Other areas OUT of SCOPE

15. 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. 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. 17 NOV 2010 ALABANY IT from Ulster SCREENING SHEET for 1099-C

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

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

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

21. 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. 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. 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. 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. 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. 26 NOV 2010 ALABANY IT from Ulster Tom & Grace Part I Form 982

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

28. 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. 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. 30 NOV 2010 ALABANY IT from Ulster SCH D Elements

31. 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. 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. 33 NOV 2010 ALABANY IT from Ulster FORM 1099-A MARY SMITH 150,000.00 100,000.00 X 1111 LOST DRIVE Your City, YS, ZIP

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

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

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

37. 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. 38 NOV 2010 ALABANY IT from Ulster MARY SMITH FORECLOSURE SCHED D, WORKSHEET 2 - GAIN

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

40. 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. 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. 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