FORECLOSURE

1
FORECLOSURE MORTGAGE DEBT FORGIVENESS

• WHAT ARE THEY?
• WHY ARE WE CONCERNED?
• IRS Pub 4702
• IRS Pub 970

2
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.

3
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

4
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)

5
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

6
Foreclosure Real Property

• 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)

7
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

8
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.

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1099-C
50,000
07/15/2008
Home Mortgage Loan
10
FORM 982
11
FORM 982

• If Debt Forgiven and Ownership Retained
• Reduce Basis by Amount of Forgiven Debt
• FORM 982, LINE 10B

12
FORM 1099-A
07/15/08
150,000
100,000
(RECOURSE) x
Home Mortgage Loan
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Foreclosure Real Property

• 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

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MARY SMITH FORECLOSURE SCHED D, WORKSHEET 2
15
MARY SMITH FORECLOSURECAP GAIN WORKSHEET - LOSS
MUST OVERRIDE to 0
16
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.

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FORM 1099-A
100,000
Sally Jones
110,000
x
Home Mortgage Loan
18
SALLY JONES FORECLOSURESCHED D, WORKSHEET 2 -
GAIN
19
SALLY JONES FORECLOSURENON-TAXABLE GAIN
F3 TO GET RED OUT
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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.

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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)

22
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.

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