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1NTTC TRAINING 2008
FORECLOSURE & MORTGAGE DEBT FORGIVENES
WHAT ARE THEY?
WHY ARE WE CONCERNED?IRS Pub 4702
IRS Pub 970
2NTTC TRAINING 2008
DEFINITIONS Foreclosure: Takeover of property by
lender 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.
3NTTC TRAINING 2008
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
4NTTC TRAINING 2008
Example: Credit Card Debt of $15,000; Borrower 6 months in arrears: Lender accepts $10,000 and closes out account.
Borrower has $5,000 of Income
DEBT CANCELLATION
6NTTC TRAINING 2008
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
8NTTC TRAINING 2008
Foreclosure –Real Property Recourse Debt – Debtor Responsible for
Amount not Satisfied by Property Possible Income from Cancelled Debt (1099-C) Capital Gain Income Possible
Nonrecourse 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)
9NTTC TRAINING 2008
EXCLUSION: CANCELLED DEBT
Can be Excluded under Special Conditions which are “OUT-OF-SCOPE” Bankruptcy Insolvency Farm or Business Use of Property
If Excluded, Not Reported on Tax Return
10NTTC TRAINING 2008
Mortgage Forgiveness Debt Relief Act of 2007; Applies to years 2007 – 2012
Defines Additional Exclusion which can be “IN-SCOPE”
EXCLUSION
11NTTC TRAINING 2008
Cancelled Debt on Principal Residence May be Excluded (Forgiven) if: Debt used to Buy, Build, or Substantially
Improve Principal Residence Debt Incurred to Refinance Debt for above
purposes Debt to Refinance Home can be Excluded
Only up to Balance of old Mortgage Immediately before Refinancing
IN-SCOPE EXCLUSION DEBT RELIEF ACT - 2007
12NTTC TRAINING 2008
SCREENING
Use IRS Screening Form to Determine Eligibility:
Screening Sheet For Volunteers Assisting Taxpayers with Form 1099-C, Cancellation of Debt –
Personal Residence
13NTTC TRAINING 2008
IRS SCREENING SHEET STEP 1: Did the Taxpayer receive a Form 1099-C, Cancellation
of Debt, from their lender only in relation to a home mortgage loan and is the information shown on the form correct?
YES – Go to Step 2 NO – Go to Step 6 STEP 2: Did the taxpayer ever use the home in a trade or
business or as rental property? YES – Go to Step 6 NO – Go to Step 3 STEP 3: Was the debt canceled as a result of a bankruptcy
case? YES – Go to Step 6 NO – Go to Step 4
14NTTC TRAINING 2008
STEP 4: Ask the following questions to determine if the discharged
debt is “qualified principal residence indebtedness”:
a. Was the mortgage taken out to buy, build, or substantially improve the taxpayer’s principal residence? (NOTE: A principal residence is generally the home where the taxpayer lives most of the time. A taxpayer can have only one principal residence at any one time.)
YES – Go to Step 4b NO – Go to Step 6
b. Was the mortgage secured by the taxpayer’s principal residence?
YES – Go to Step 4c NO – Go to Step 6
IRS SCREENING SHEET
15NTTC TRAINING 2008
STEP 4 (cont) c. Was any part of the mortgage used to pay off credit
cards, purchase a car, pay for tuition, pay for a vacation, pay medical/dental expenses, or used for any other purpose other than to buy, build, or substantially improve the principal residence?
YES – Go to Step 6 NO – Go to Step 4d
d. Was the mortgage amount more than $2 Million ($1 Million if married filing separately)?
YES – Go to Step 6 NO – Go to Step 5
IRS SCREENING SHEET
16NTTC TRAINING 2008
STEP 5: A trained volunteer with an Advanced
Certification may assist the taxpayer with the Form 1099-C at a VITA/TCE Site.
STEP 6: These tax issues are outside the
scope of the volunteer program.
IRS SCREENING SHEET
17NTTC TRAINING 2008
CANCELLATION OF DEBT REPORTING
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
18NTTC TRAINING 2008
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
19NTTC TRAINING 2008
TAXWISE REPORTING
If 1099-C for a “qualified principal residence indebtedness”: Open Form 982 from Forms List Check Box 1e; Enter Value from 1099-C,
Box 2 on Line 2. If Property NOT Foreclosed,
Enter 1099-C Box 2 Amount on Line 10 of Form 982
22NTTC TRAINING 2008
FORM 982
If Debt Forgiven and Ownership Retained: Reduce Basis by Amount of Forgiven Debt
FORM 982, LINE 10B
23NTTC TRAINING 2008
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
NON-RECOURSE Box 2 is Sales Price
Foreclosure –Real Property
25NTTC TRAINING 2008
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
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
26NTTC TRAINING 2008
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.
27NTTC TRAINING 2008
FORM 1099-A
MARY SMITH
150,000.00
100,000.00
X
1111 LOST DRIVEYour City, YS, ZIP
31NTTC TRAINING 2008
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
33NTTC TRAINING 2008
MARY SMITH FORECLOSURENON-TAXABLE GAIN
2ND Entry Required to Record Exclusion -= Zero out Gain