Foreclosures on the Rise

Foreclosures

Foreclosures on the Rise

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• _{Top 4 states at Sep 30, 2009:Top 4 states at Sep 30, 2009:}

– Nevada – Arizona California – California – Florida • _{2.5 million properties received default p p} notice first 9 months of 2009

• _{8.1 million at risk in next 4 years8.1 million at risk in next 4 years}

IRS Collection Practice Eased

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• Tax liens subordinate if • Tax liens subordinate if 

refinance/sell

1. (IR‐2008‐141); Pub. 784 and Pub. 783

2. Discharge of IRS tax lien if mortgage 2. Discharge of IRS tax lien if mortgage 

IRS Collection Practice Eased

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• Collection efforts ease (IR 2009 2) • Collection efforts ease (IR 2009‐2)

1. Actions postponed

2. Flexibility if payments missed

3. OIC ‐ second review before rejection 3. OIC  second review before rejection 4. Easing of OIC late payment penalties

5 E dit d l l

5. Expedited levy release

Foreclosure Equals COD Income

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Foreclosure Equals COD Income

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Calculation is different if; –_{Calculation is different if;}

• Nonrecourse debt (not personally  liable)

• Recourse debt (personally liable)Recourse debt (personally liable)

Foreclosures

• _{In some states debt to buy a personal} • _{In some states debt to buy a personal} 

residence is non‐recourse

Foreclosure Nonrecourse Debt

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$600,000 Adjusted Basis

($50,000) Loss

Foreclosure Gain (Loss) $550,000

Sales Proceeds (Debt)

Foreclosure Recourse Debt

Worksheet

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• Calculates COD income for • _{Calculates COD income for}

Property Type Matters

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• Business investment or personal • _{Business, investment or personal} 

determining

– _{Business = ordinary loss on sale} – Investment = capital loss on saleInvestment   capital loss on sale

– Personal = non deductible loss on sale

Foreclosure of Business Property 8 1 Calculate COD 1. Calculate COD 1. Loan less FMV 2. Calculate gain or loss on “sale” 1 FMV t f l i l i 1. FMV at foreclosure is sales price

3. Character of gain or loss same as if 3. Character of gain or loss same as if 

Sharon Loses Las Vegas Rental

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• COD equals loan less FMV • _{COD equals loan less FMV}

–$150,000 ordinary income

• Gain or loss equals FMV less adjusted  basis of property lost

basis of property lost

–_{$180,000 ordinary loss}

Property Acquired in Exchange

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• COD equals loan less FMV • _{COD equals loan less FMV}

–$50,000 ordinary income

• Gain or loss equals FMV less adjusted  basis of property lost

basis of property lost 

Short Sale

• Where the client sells the house for • _{Where the client sells the house for} 

its FMV and after expenses, there is  not enough to pay off the bank.

• If the “short pay” is forgiven by the • If the  short pay  is forgiven by the 

bank, COD results (Stevens)

• And the bank will file a Form 1099C.

Exception to COD Income Rule

• _{Farm debt for solvent farmerFarm debt for solvent farmer} • Seller financing

If f li bili ld d d i

• If payment of liability would create deduction • Discharge of real property business debt

Form 982

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Insolvency Worksheet

• Taxpayer insolvent to extent • _{Taxpayer insolvent to extent} 

liabilities exceed assets

–Includes house, pension, IRA, autos,  furniture, tools, etc.

furniture, tools, etc.

108: Qualified Farm Debt

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1 If debt incurred in operating farm and 1. If debt incurred in operating farm, and  2. 50% of receipts from farming last 3 yrsp g y • COD reduces basis. Not taxable income

108: Real Property Bus. Debt

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• Debt to acquire construct or • _{Debt to acquire, construct or} 

improve real property used in a trade  or business

• Elect to reduce basis instead of COD • Elect to reduce basis instead of COD • Relief can’t exceed FMV

Reduction of Tax Attributes 18 • _{For non‐taxable COD reduce tax}  attributes in the following order: 1.NOLs 2.General business credits 3.AMT Credits 3.AMT Credits 4.Capital losses 5.Basis reduction 5.Basis reduction 6.Passive activity losses 7 Foreign tax credits

Karen Brosi ©2009

7.Foreign tax credits

Cancellation of Debt Relief 108(i)

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COD Relief 108(i)

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COD Relief 108(i)

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• Trade or business debt and all entitiesTrade or business debt and all entities

Qualified Residence

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108 Exclusion

• _{Bankruptcyp y} • _Insolvency

• Farm debt for solvent farmer • Farm debt for solvent farmer • Seller financing

• If payment of liability would create deduction • Discharge of real property business debtg p p y

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Principal Residence

Requirement #1: Qualified Principal Requirement #1: Qualified Principal 

Residence 

–See $250,000/$500,000 exclusion of  gain on sale of home rules for

21 Qualified Home Acquisition Debt

Requirement #2: Qualified Acquisition Requirement #2: Qualified Acquisition 

i i l fi d d b d f

• Original or refinanced debt used for  acquisition, construction or 

California Cancellation of Debt

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• Partial conformity to federal • _{Partial conformity to federal} 

mortgage forgiveness debt relief

–BUT ONLY FOR 2007 AND 2008

• Imposes lower limits on qualified • Imposes lower limits on qualified 

22 Only Part is Acquisition Debt

• Ordering rules are required if • _{Ordering rules are required if} 

acquisition debt less than total debt  relief

• Any forgiven home equity debt not • Any forgiven home equity debt not 

used for improvements cannot be  excluded

Karen Brosi ©2009

22 Only Part is Acquisition Debt

• Holly refinances her home and takes • _{Holly refinances her home and takes} 

22 Example of Mortgage Modification

• Purchase price: $435 000Purchase price: $435,000

• 1st recourse mortgage: $420,000

• 2nd improvement mortgage: $30,000

fi $ 000 h 2 l $ 0 000 • Refi to $475,000 when 2 loans $440,000 • FMV reduces to $425 000 & bank agreesFMV reduces to $425,000 & bank agrees 

to $40,000 mortgage modification

Karen Brosi ©2009

Checklist for Exclusion

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• Must be principal residence • _{Must be principal residence}

• Must be acquisition indebtednessq • Homeowner not bankrupt

• Homeowner not insolvent

• Cancellation is not for personal • Cancellation is not for personal 

Excluding COD on Home

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Excluding COD on Home

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• Exclusion does not apply to a debtor in a • _{Exclusion does not apply to a debtor in a} 

bankruptcy case

–The exclusion due to bankruptcy applies  Taxpayer may choose insolvency exclusion –Taxpayer may choose insolvency exclusion

Form 982

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