MORTGAGE DEBT FORGIVENESS RELIEF ACT

1. MORTGAGE DEBT FORGIVENESS RELIEF ACT

2. 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. DEFINTIONS

4. Definitions(continued)

5. 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. 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 optionto 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. 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. FORM 1099-C

9. FORM 1099-A

10. 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. NY STATE One action state; Lender must choose: (1) Foreclosing on property (2) Sue to collect debt

12. 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. 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. Exclusions Eliminate Income Discharge of qualified principal indebtedness Other areas OUT of SCOPE

15. 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. 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. SCREENING SHEET for 1099-C

18. SCREENING SHEET for 1099-C

19. SCREENING SHEET for 1099-C

20. SCREENING SHEET for 1099-C

21. 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. 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. 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. 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. 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. Tom & Grace Part I Form 982

27. TOM & GRACE Form 982 Part II 10b

28. FORECLOSUREREAL 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. 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. SCH D Elements

31. SCHEDULE D VERIFY ELEMENTS WHEN BOTH FORMS EXIST

32. 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. FORM 1099-A 150,000.00 MARY SMITH 100,000.00 X 1111 LOST DRIVE Your City, YS, ZIP

34. MARY SMITH FORECLOSURE SCHED D, WORKSHEET 2

35. MARY SMITH FORECLOSURECAP GAIN WORKSHEET - LOSS MUST OVERRIDE to 0

36. MARY SMITH FORECLOSURESCHED D ENTRY – LOSS SCH D must be filed with return

37. EXAMPLE 2: FORECLOSUREGAIN WITHIN EXCLUSION • Mary Smith purchased her main home in June 2003 for $175,000. (From 1st Example) • Change purchase price to $80,000

38. MARY SMITH FORECLOSURESCHED D, WORKSHEET 2 - GAIN

39. MARY SMITH FORECLOSURENON-TAXABLE GAIN F3 TO “GET RED OUT

40. MARY SMITH FORECLOSURENON-TAXABLE GAIN SCH D must be filed 2ND Entry Required to Record Exclusion -= Zero out Gain

41. 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. MORTGAGE DEBT FORGIVENESS RELIEF ACT QUESTIONS? COMMENTS? Like a duck upon the sea serenely paddling unaware of the fathomless depths below