MORTGAGE DEBT
FORGIVENESS RELIEF ACT
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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
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DEFINTIONS
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Definitions(continued)
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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
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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 option to 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
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Possible Lender
Transactions(continued)
 Most mortgages are recourse debt
 BOX 5 , Form 1099-A indicates recourse or nonrecourse
 If lender issues Form 1099-C instead: implies a
recourse loan
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FORM 1099-C
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FORM 1099-A
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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
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NY STATE
 One action state; Lender must choose:
 (1) Foreclosing on property
 (2) Sue to collect debt
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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)
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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 !!!!!
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Exclusions Eliminate Income
 Discharge of qualified principal
indebtedness
 Other areas OUT of SCOPE
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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
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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
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SCREENING SHEET for 1099-C
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SCREENING SHEET for 1099-C
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SCREENING SHEET for 1099-C
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SCREENING SHEET for 1099-C
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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
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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
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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
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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
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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?
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Tom & Grace Part I Form
982
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TOM & GRACE Form 982
Part II 10b
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FORECLOSURE
REAL 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)
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FORECLOSUREHOMEOWNER 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
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SCH D Elements
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SCHEDULE D
RECOURSE
NONRECOURSE
Form 1099-A
BOX 5
CHECKED
BOX 5 BLANK
SALES PRICE
Lesser of BOX 2 BOX 2
or BOX 4
Form 1099-C
BOX 5
CHECKED
BOX 5 BLANK
SALES PRICE
BOX 7
BOX 7
VERIFY ELEMENTS WHEN BOTH FORMS EXIST
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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.
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FORM 1099-A
150,000.00
MARY SMITH
100,000.00
X
1111 LOST DRIVE
Your City, YS, ZIP
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MARY SMITH FORECLOSURE
SCHED D, WORKSHEET 2
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MARY SMITH FORECLOSURE
CAP GAIN WORKSHEET - LOSS
MUST OVERRIDE to 0
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MARY SMITH FORECLOSURE
SCHED D ENTRY – LOSS
SCH D must be filed with return
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EXAMPLE 2: FORECLOSURE
GAIN WITHIN EXCLUSION
 Mary Smith purchased her main home in
June 2003 for $175,000. (From 1st
Example)
 Change purchase price to $80,000
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MARY SMITH FORECLOSURE
SCHED D, WORKSHEET 2 - GAIN
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MARY SMITH FORECLOSURE
NON-TAXABLE GAIN
F3 TO “GET RED OUT
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MARY SMITH FORECLOSURE
NON-TAXABLE GAIN
SCH D must be filed
2ND Entry Required to Record Exclusion -= Zero out Gain
NTTC TRAINING 2009
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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)
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MORTGAGE DEBT FORGIVENESS
RELIEF ACT
QUESTIONS?
COMMENTS?
Like a duck upon the sea serenely paddling unaware
of the fathomless depths below
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