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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. FORECLOSURE & MORTGAGE DEBT REDUCTION. Foreclosure: Takeover of property by lender – Homeowner loses home and moves out

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mortgage debt forgiveness relief act
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
foreclosure mortgage debt reduction
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
foreclosure real property
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)
foreclosure or mortgage debt reduction
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

debt reduction or foreclosure
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
mortgage debt reduction homeowner keeps possession
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

debt reduction reporting
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
foreclosure homeowner loses possession
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

foreclosure homeowner loses possession form 1099 a
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 POSSESSIONForm 1099-A
cancellation of debt reporting
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
form 982 line 10b
FORM 982Line 10b
  • Partial mortgage debt forgiven and ownership retained:
    • Reduce basis by amount of debt forgiven