Counter
Our Mission
To offer Affordable and  Professional tax
services and advice to individuals and
small businesses.
Contact:

1301 Lincoln Ave.
Alameda, CA 94501

Tel.: (510) 522-3677
Fax: (510) 522-3698
Lloyd W. Phraner, EA  lloyd@aptaxes.com

In Budapest Hungary           Beszélek Magyarul
Andrew Alatorre, EA   andrew@aptaxes.com

Expanded Tax Break Available for 2009 First-Time Homebuyers

IR-2009-14, Feb. 25, 2009

WASHINGTON — The Internal Revenue Service announced today that taxpayers
who qualify for the first-time homebuyer credit and purchase a home this year
before Dec. 1 have a special option available for claiming the tax credit either on
their 2008 tax returns due April 15 or on their 2009 tax returns next year.
Qualifying taxpayers who buy a home this year before Dec. 1 can get up to
$8,000, or $4,000 for married filing separately.

“For first-time homebuyers this year, this special feature can put money in their
pockets right now rather than waiting another year to claim the tax credit," said
IRS Commissioner Doug Shulman. “This important change gives qualifying
homebuyers cash they do not have to pay back.”

The IRS has posted a revised version of Form 5405, First-Time Homebuyer
Credit, on IRS.gov. The revised form incorporates provisions from the American
Recovery and Reinvestment Act of 2009. The instructions to the revised Form
5405 provide additional information on who can and cannot claim the credit,
income limitations and repayment of the credit.

This year, qualifying taxpayers who buy a home before Dec. 1, 2009, can claim
the credit on either their 2008 or 2009 tax returns. They do not have to repay the
credit, provided the home remains their main home for 36 months after the
purchase date. They can claim 10 percent of the purchase price up to $8,000, or
$4,000 for married individuals filing separately.

The amount of the credit begins to phase out for taxpayers whose adjusted gross
income is more than $75,000, or $150,000 for joint filers.

For purposes of the credit, you are considered to be a first-time homebuyer if
you, and your spouse if you are married, did not own any other main home during
the three-year period ending on the date of purchase.

The IRS also alerted taxpayers that the new law does not affect people who
purchased a home after April 8, 2008, and on or before Dec. 31, 2008. For these
taxpayers who are claiming the credit on their 2008 tax returns, the maximum
credit remains 10 percent of the purchase price, up to $7,500, or $3,750 for
married individuals filing separately. In addition, the credit for these 2008
purchases must be repaid in 15 equal installments over 15 years, beginning with
the 2010 tax year.




1. What is Cancellation of Debt?

If you borrow money from a commercial lender and the lender later cancels or
forgives the debt, you may have to include the cancelled amount in income for tax
purposes, depending on the circumstances. When you borrowed the money you
were not required to include the loan proceeds in income because you had an
obligation to repay the lender. When that obligation is subsequently forgiven, the
amount you received as loan proceeds is reportable as income because you no
longer have an obligation to repay the lender. The lender is usually required to
report the amount of the canceled debt to you and the IRS on a Form 1099-C,
Cancellation of Debt.

Here’s a very simplified example. You borrow $10,000 and default on the loan
after paying back $2,000. If the lender is unable to collect the remaining debt
from you, there is a cancellation of debt of $8,000, which generally is taxable
income to you.


2. Is Cancellation of Debt income always taxable?

Not always. There are some exceptions. The most common situations when
cancellation of debt income is not taxable involve:

Bankruptcy: Debts discharged through bankruptcy are not considered taxable
income.
Insolvency: If you are insolvent when the debt is cancelled, some or all of the
cancelled debt may not be taxable to you. You are insolvent when your total
debts are more than the fair market value of your total assets. Insolvency can be
fairly complex to determine and the assistance of a tax professional is
recommended if you believe you qualify for this exception.
Certain farm debts: If you incurred the debt directly in operation of a farm, more
than half your income from the prior three years was from farming, and the loan
was owed to a person or agency regularly engaged in lending, your cancelled
debt is generally not considered taxable income. The rules applicable to farmers
are complex and the assistance of a tax professional is recommended if you
believe you qualify for this exception.
Non-recourse loans: A non-recourse loan is a loan for which the lender’s only
remedy in case of default is to repossess the property being financed or used as
collateral. That is, the lender cannot pursue you personally in case of default.
Forgiveness of a non-recourse loan resulting from a foreclosure does not result
in cancellation of debt income. However, it may result in other tax consequences,
as discussed in Question 3 below.


3. I lost my home through foreclosure.  Are there tax consequences?  

There are two possible consequences you must consider:

Taxable cancellation of debt income.(Note: As stated above, cancellation of debt
income is not taxable in the case of non-recourse loans.)
A reportable gain from the disposition of the home (because foreclosures are
treated like sales for tax purposes).(Note: Often some or all of the gain from the
sale of a personal residence qualifies for exclusion from income.)
Use the following steps to compute the income to be reported from a foreclosure:

Step 1 - Figuring Cancellation of Debt Income (Note: For non-recourse loans,
skip this section.  You have no income from cancellation of debt.)

1. Enter the total amount of the debt immediately prior to the foreclosure.
___________
2. Enter the fair market value of the property from Form 1099-C, box 7.
___________
3. Subtract line 2 from line 1.If less than zero, enter zero.___________


The amount on line 3 will generally equal the amount shown in box 2 of Form
1099-C.  This amount is taxable unless you meet one of the exceptions in
question 2.  Enter it on line 21, Other Income, of your Form 1040.

Step 2 – Figuring Gain from Foreclosure

4. Enter the fair market value of the property foreclosed. For non-recourse loans,
enter the amount of the debt immediately prior to the foreclosure ________
5.    Enter your adjusted basis in the property.(Usually your purchase price plus
the cost of any major improvements.)                                    ____________
6. Subtract line 5 from line 4.  If less than zero, enter zero.   

The amount on line 6 is your gain from the foreclosure of your home.  If you have
owned and used the home as your principal residence for periods totaling at least
two years during the five year period ending on the date of the foreclosure, you
may exclude up to $250,000 (up to $500,000 for married couples filing a joint
return) from income.  If you do not qualify for this exclusion, or your gain exceeds
$250,000 ($500,000 for married couples filing a joint return), report the taxable
amount on Schedule D, Capital Gains and Losses.



4. I lost money on the foreclosure of my home.  Can I claim a loss on my
tax return?   

No.  Losses from the sale or foreclosure of personal property are not deductible.  


5.  Can you provide examples?

A borrower bought a home in August 2005 and lived in it until it was taken
through foreclosure in September 2007. The original purchase price was
$170,000, the home is worth $200,000 at foreclosure, and the mortgage debt
canceled at foreclosure is $220,000. At the time of the foreclosure, the borrower
is insolvent, with liabilities (mortgage, credit cards, car loans and other debts)
totaling $250,000 and assets totaling $230,000.

The borrower figures income from the foreclosure as follows:

Use the following steps to compute the income to be reported from a foreclosure:

Step 1 - Figuring Cancellation of Debt Income (Note: For non-recourse loans,
skip this section.  You have no income from cancellation of debt.)

1. Enter the total amount of the debt immediately prior to the foreclosure.
___$220,000__
2. Enter the fair market value of the property from Form 1099-C, box 7.
___$200,000__
3. Subtract line 2 from line 1.If less than zero, enter zero.___$20,000__

The amount on line 3 will generally equal the amount shown in box 2 of Form
1099-C.  This amount is taxable unless you meet one of the exceptions in
question 2.  Enter it on line 21, Other Income, of your Form 1040.

Step 2 – Figuring Gain from Foreclosure

4. Enter the fair market value of the property foreclosed.For non-recourse loans,
enter the amount of the debt immediately prior to the foreclosure. __$200,000__
5.  Enter your adjusted basis in the property.(Usually your purchase price plus
the cost of any major improvements.)                                        ___$170,000__
6. Subtract line 5 from line 4.If less than zero, enter zero.___$30,000__


The amount on line 6 is your gain from the foreclosure of your home.  If you have
owned and used the home as your principal residence for periods totaling at least
two years during the five year period ending on the date of the foreclosure, you
may exclude up to $250,000 (up to $500,000 for married couples filing a joint
return) from income.  If you do not qualify for this exclusion, or your gain exceeds
$250,000 ($500,000 for married couples filing a joint return), report the taxable
amount on Schedule D, Capital Gains and Losses.

In this situation, the borrower has a tax-free home-sale gain of $30,000
($200,000 minus $170,000), because they owned and lived in their home as a
principal residence for at least two years. Ordinarily, the borrower would also
have taxable debt-forgiveness income of $20,000 ($220,000 minus $200,000).
But since the borrower’s liabilities exceed assets by $20,000 ($250,000 minus
$230,000) there is no tax on the canceled debt.

Other examples can be found in IRS Publication 544, Sales and Other
Dispositions of Assets, under the section “Foreclosures and Repossessions”.



6.  I don’t agree with the information on the Form 1099-C.  What should I
do?

Contact the lender.  The lender should issue a corrected form if the information is
determined to be incorrect.  Retain all records related to the purchase of your
home and all related debt.



7.  I received a notice from the IRS on this. What should I do?

The IRS urges borrowers with questions to call the phone number shown on the
notice. The IRS also urges borrowers who wind up owing additional tax and are
unable to pay it in full to use the installment agreement form, normally included
with the notice, to request a payment agreement with the agency.



8. Where else can I go to get tax help?

If you are having difficulty resolving a tax problem (such as one involving an IRS
bill, letter or notice) through normal IRS channels, the Taxpayer Advocate Service
may be able to help. For more information, you can also call the TAS toll-free
case intake line at 1-877-777-4778, TTY/TDD 1-800-829-4059.

In some cases, you may qualify for free or low-cost assistance from a Low Income
Taxpayer Clinic (LITC).  LITCs are independent organizations that represent low
income taxpayers in tax disputes with the IRS. Find information on an LITCs in
your area.