MORTGAGE DEBT FORGIVENESS RELIEF ACT

1. 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

2. 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. 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)

4. 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. 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. 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. 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. FORM 1099-C

9. 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. 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

11. FORM 1099-A

12. 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. FORM 982Lines 1e & 2

14. FORM 982Line 10b • Partial mortgage debt forgiven and ownership retained: • Reduce basis by amount of debt forgiven

15. MORTGAGE DEBT FORGIVENESS RELIEF ACT QUESTIONS? COMMENTS?