... deducted on Schedule C charged to Discover Card and you

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• Repossession and Foreclosure Issues

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Repossession and Foreclosure

• Important Terms
• Foreclosure/Repossession
• Forms 1099- A or C
• Non-recourse debt
• Recourse Debt
• Debt Forgiveness Income
• Insolvency

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Repossession and Foreclosure

• Potential Tax Forms Involved
• New Form 982 (Revised Feb 2008)
• 1099-A
• 1099-C
• Form 4797
• Schedule D

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Repossession and Foreclosure

• Non Recourse Debt Example
• Joanie bought a rental property on 5-1-94 for
  85,000. On 6-21-2008 she still owed 60,000 on
  the principal when she voluntarily gave it back
  to the seller. Her loan is a non recourse loan.

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Repossessions and Foreclosures

• Purchase price 85,000
• Less Depr allowed/allowable 40,000
• Adjusted Basis 45,000
• Sales Price 60,000
• (Balance owed when repossessed)
• Less Adjusted Basis 45,000
• Gain on Disposition 15,000

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Repossessions and Foreclsoures

• Thoughts Non-recourse example
• Loan balance is selling price
• Gain is reported on 4797
• Form 1099-A will be issued

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Repossession and Foreclosure

• Recourse Debt Example The sales price is the
  lesser of the FMV of the property or the debt
  outstanding.
  
• Taxpayer is still liable for any balance.
• Write off of remaining debt will result in debt
  forgiveness income.
  

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Repossessions and Foreclosures

• Eddie bought a rental property in 1999. It was
  repossessed in 2008 when he still owed 65,000 on
  the note. The loan was a recourse loan. His
  gain or loss is computed as follows

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Repossessions and Foreclosures

• Recourse Debt Example
• FMV when repossessed 50,000
• Balance on the note 65,000
• Lesser of the two is the selling
  price 50,000
  
• Purchase price 85,000
• LessDepr 28,000
• Adjusted Basis 57,000
• Loss on the sale (7,000)

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Repossessions and Foreclosures

• Loss is reported on 4797 since it was investment
  property.
  
• Section 1231 loss not subject to the 3,000
  capital loss limitation
  
• Eddie is still responsible for the 15,000
  difference (65,000 note-50,000 FMV)
  
• If forgiven, Eddie has debt forgiveness income.

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Repossessions and Foreclosures

• Discussion
• Still a sale but at what price?
• Seller still has liability
• Debt forgiveness income potential

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Repossessions and Foreclosures

• Debt Forgiveness Income
• Goes back from whence it came
• Example Business supplies deducted on Schedule
  C charged to Discover Card and your client does
  not pay. Discover issues Form 1099-C
  (Cancellation of Indebtedness). Debt forgiveness
  income goes on Schedule C!

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Repossession and Foreclosure

• Exceptions to Debt Forgiveness Income
• Bankruptcy What Form?
• Insolvency To what extent?
• Qualified Farm Indebtedness
• Qualified Real Property Indebtedness
• NewQualified Personal Residence
• Indebtedness

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Repossessions and Foreclosures

• Ordering Rules
• Bankruptcy
• Insolvency
• Qualified Farm Indebtedness
• Qualified Real Property Indebtedness

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Repossessions and Foreclosures

• Form 982 is used to either exempt debt
  forgiveness income or to reduce tax attributes
  which can affect your client later.
  
• Example Kay owns a rental property with a cost
  of 270,000. She had claimed 7,000 of regular
  depreciation but due to an insolvency in 2005,
  her basis was reduced by 20,000. This will lead
  to a higher gain and greater Section 1250
  recapture income upon sale.

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Repossessions and Foreclosures

• The Forgiveness of Debt doesnt just go away!!

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Repossession and Foreclosure

• Bankruptcy Issues
• Chapter 7 (Separate Estate)
• Chapter 13 (Billpayer plan)
• Discharge of Taxes (Dont file too soon)
• Two short year returns (Sec.1398 Election)

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Repossession and Foreclosure

• Bankruptcy Examples
• First Priority Claims Within 3 years
• Mary Any return filed up to April 15 is
  considered as filed on April 15. Mary files
  bankruptcy on April 1, 2008. Three years looks
  back to returns filed (timely) to 2005 2006 and
  2007. Taxes from these years will not be
  dischargeable.

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Repossessions and Foreclosures

• Wally Extended returns, even if filed before the
  extension period ends are considered as filed on
  October 15. Wally files bankruptcy on May 12,
  2008. His 2005 return was filed via extension
  (after April 15). This places the 2005 taxes
  within the three year period and they are
  therefore not dischargeable.

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Repossessions and Foreclosures

• Sending Tax Attributes to the Bankruptcy
  Estate
  
• Example Joann filed Chapter 7 bankruptcy July
  31, 2007. There is 2,400 of depreciation
  available for the year. Because the bankruptcy
  estate was created in July, Joann receives 7
  months of the depreciation and the estate
  receives the rest.

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Repossessions and Foreclosures

• Two Short Year Returns (Section 1398(d))
• Get your client to call you before he acts
• Who?
• Taxpayers with NOL carryforwards
• Taxpayers with Capital Loss carryforwards
• Tax Credit Carryovers
• Charitable Contributions Carryovers
• Do we want these benefits all going to the
  bankruptcy estate?
  

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Repossession and Foreclosure

• Mortgage Forgiveness Debt Relief Act
• Debt must be incurred for acquisition,
  construction, or substantial improvement of
  taxpayers principal residence and secured by
  that residence.
• Maximum 2 million (1 million for MFS)
• 1099A and or C will be issued.
• Use Form 982
• Basis reduction based on amount of debt forgiven
• Section 121 exclusion rules apply.

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Repossession and Foreclosures

• Another New Housing Bill (Law)!
• First Time Homebuyer Credit
• Relief(?) for holders of ARMS
• Increased Standard Deduction for those who pay
  property taxes

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Repossessions and Foreclosures