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 taxpayers 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 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

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 982 Lines 1e 2
14
FORM 982 Line 10b

• Partial mortgage debt forgiven and ownership
  retained
• Reduce basis by amount of debt forgiven

15
MORTGAGE DEBT FORGIVENESS RELIEF ACT
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