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FORECLOSURE & MORTGAGE DEBT FORGIVENESS. WHAT ARE THEY? WHY ARE WE CONCERNED? IRS Pub 4702 IRS Pub 970. DEFINITIONS. Foreclosure: Takeover of property by lender, court process involved Reportable ON Sched D; Possible Capital Gain may be Reduced by Exclusion
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FORECLOSURE & MORTGAGE DEBT FORGIVENESS WHAT ARE THEY? WHY ARE WE CONCERNED? IRS Pub 4702 IRS Pub 970
DEFINITIONS Foreclosure: Takeover of property by lender, court process involved 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.
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
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 owed Possible Gain Due to “Sale” of Property (1099-A)
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
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 listed on Sched D NON-RECOURSE (will not see ,very rare) 1099-A(example: Hyundai ad ) Box 2 is always Sales Price (Bal of Debt) Foreclosure –Real Property
CANCELLATION OF DEBT REPORTING - RECOURSE DEBT 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
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.
1099-C 07/15/2008 50,000 Home Mortgage Loan
FORM 982 If Debt Forgiven and Ownership Retained: Reduce Basis by Amount of Forgiven Debt FORM 982, LINE 10B
FORM 1099-A 07/15/08 150,000 100,000 (RECOURSE) x Home Mortgage Loan
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 (Lesser) 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
MARY SMITH FORECLOSURE SCHED D, WORKSHEET 2
MARY SMITH FORECLOSURECAP GAIN WORKSHEET - LOSS MUST OVERRIDE to 0
FORECLOSUREGAIN WITHIN EXCLUSION Sally Jones purchased her main home in June 2003 for $120,000. Due to a Casualty Loss she deducted, her Adjusted Basis in the house is $80,000. In 2008 she lost her job and was no longer able to make her payments on this recourse mortgage. In July, Sally 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 $110,000 because of the poor housing market, Sally still owed $100,000 on the mortgage. None of the loan proceeds were used for any purpose other than to buy, build, or substantially improve the principal residence.
FORM 1099-A 100,000 Sally Jones 110,000 x Home Mortgage Loan
SALLY JONES FORECLOSURENON-TAXABLE GAIN F3 TO “GET RED OUT
Schedule D Reporting of NonRecourse Debt • To compute the realized gain or loss due to a Foreclosure of a nonrecourse debt, the amount of Debt cancelled is the Sale Price. • A gain can be offset by Section 121 if the conditions are met for exclusion. • If loss occurs due to foreclosure of Personal residence, it is a nondeductible loss.
Non Recourse Debt No Cancellation of Debt if Non-Recourse *1099-A Box 5 is NO *No 1099-C issued * Do not complete form 982 *Selling Price on Schedule D is Box 2 of 1099-A (Full Amount of Debt Cancelled)
Non Recourse Debt George Wilson paid $200,000 for his home. He borrowed $190,000 from a bank. He is not personally liable for the loan (nonrecourse debt). He pledges the house as security. Due to lack of payments, the bank foreclosed on the house. The loan balance was $180,000 and the FMV was $170,000. The amount realized on foreclosure is $180,000 (debt cancelled) and there is no Cancellation of Debt to be reported.
