Deed in lieu of foreclosure?

Question

If I'm doing a deed in lieu of forelcosure, how will I know if there will be any tax ramifications from the irs? The house is worth 92,000 and i owe 97,000. They are forgiving the debt and the house goes back to them. Anyone know how to find out if I will have to pay tax on that? What percentage and of how much of the debt?

Answer 1

YES NO MAYBE SOOO...  but with the mortgage relief act of 2007 that bush passed you will not receive a 1099 for the feds... here is the kicker... make sure you check with your state =)

Answer 2

You used to have to pay taxes on forgiven debt as if it were income, but they changed the law.  Unfortunately the new law is so convoluted that I'd not sure if you would have to pay tax on this or not (but I think you would owe no taxes).  I was trying to look up the new law (mortgage relief forgiveness act - or something like that, but its a pain to read thru).  So, here is a link that discusses the new law.  The answer is in there somewhere (but best guess, no taxes):

http://www.homesalessandiego.com/blog/mo...

PS - Checking the new law more carefully, it seems to say there are no taxes on debt forgiven before Jan 1, 2010 (as well as some other types of debt), so apparently you would not owe taxes on this.

Answer 3

You will NOT get a 1099 for the difference.

Bush signed a waiver for people who have to do Deed in Lieu's or short sales on their primary residence for this year...not sure about next year.

Your agree to leave the house is PRISTINE condition and they agree to forgive the difference...but get it in writing before you actually stop paying the mortgage.

How much and what percentage, is up to the bank.

PS:  Landlord is wrong.  Deed in Lieu's will still destroy your credit, they are the same as a foreclosure for future lending purposes.  Underwriters are trained to spot for these on credit reports.

However, it's better than a forced foreclosure because you avoid a deficiency judgement if the sale of the house at auction doesn't cover your principle balance.

Answer 4

Congrats on getting out of this without destroying your credit and future.

You will have to pay income tax on the 5k, no other tax.

Answer 5

If anything, you would be 10-99'd for the $5000, as though it were regular income.

Answer 6

Have they told you the balance will be forgiven? You want to make sure they record the mortgage as "satisfied" in the assessors office.  Otherwise, it will be a 1099 form given to the IRS that grosses up your income for this year.