Tax Implications of a Deed in Lieu of Foreclosure (or short sale)

By
Real Estate Services with S.P.O.C.H. a 501c3 Charitable NP

 

 Q. Are there tax implications when an owner gives a lender a deed in lieu of foreclosure to avoid a foreclosure proceeding?

My answer  included information about preforeclosure short sales, too, but the reporter chose not to include this information.  Frankly, I haven't seen too many DILs.  Many people are under the mistaken belief that accepting a Deed In Lieu of foreclosure is commonplace.  But it's not.  Not yet, anyway.  Lenders would much rather entertain a preforeclosure short sale than take the deed, and take back the property without first an attempt to sell.

 

 

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Tags:
dil
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Anonymous #10
Anonymous
K

I did a DIL in 08.  The foreclosure sale was closing in me, short sale to no avail.  I mistakenly thought the tax implication would be similar to a short sale - Whereby I was responsible for only the difference between loan balance and what the house sold for.  My house sold two months after the DIL.  NOT THE CASE!  I have my 1099 now for the entire loan balance.  While I should be fine under mortgage relief Act, I have this going toward my lifetime capital gains limit.  Seriously affecting my future. 

January 29, 2009 02:54 PM
Rainer
33,648
David Petrovich
S.P.O.C.H. a 501c3 Charitable NP

That doesn't seem right.

 

The bad news comes directly from the IRS, via Publication 544:

"If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. This is true even if you voluntarily return the property to the lender. ... You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized."

Those calculations also take into consideration any cancellation of debt income and the type of mortgage.

So yes, you could indeed pay tax on the money that was used to pay back the mortgage even though you don't get any of it.

The popular home sale gain exclusion allows a single homeowner who sells his property under more favorable circumstances to exclude up to $250,000 profit from taxes; the exclusion is $500,000 for married couples filing jointly.

The exclusion also applies in foreclosures. As long as the seller, in this case the foreclosed-upon owner, lived in the home as his principal residence for two of the last five years, he also can avoid taxes on any capital gain profit, phantom or real.

January 29, 2009 03:09 PM
Anonymous #12
Anonymous
eugene johnson

My son bot a California condo in 2005 and hasn't lived in it since late 2006. It has been on the market and empty since late 2006. Mortgage is 135m. Current value is 60-65m. Payments are delinquint last 3 months.

What is their best alternative? Seems like a short sale might be so they don't have a 1099 for 135m if foreclosure or DIL. Does the IRS have a program so the amt can be over a 5 yr. period or so without interest?

Thx, Gene

May 09, 2009 09:48 PM
Anonymous #13
Anonymous
eugene johnson

My son bot a California condo in 2005 and hasn't lived in it since late 2006. It has been on the market and empty since late 2006. Mortgage is 135m. Current value is 60-65m. Payments are delinquint last 3 months.

What is their best alternative? Seems like a short sale might be so they don't have a 1099 for 135m if foreclosure or DIL. Does the IRS have a program so the amt can be over a 5 yr. period or so without interest?

Thx, Gene

May 09, 2009 09:50 PM
Anonymous #14
Anonymous
Mary Christiansen

I bought a mobile home park and had to close it after several years.  I put property up for sale and continued making the monthly payments for years, but as property was not worth what was owed. I gave back to bank with a DIL.  I don't think property has sold.  Bank said they are checking on it, but could not tell me if I would be getting a 1099 for the unpaid balance.  What are your thoughts?  Anything I should do to ease tax burden? 

December 26, 2009 10:11 PM
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Rainer
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David Petrovich

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Additional Information

All things foreclosure: subprime & predatory lending updates, mortgage origination fraud, loan servicing errors, loss mitigation, preforeclosure sale and preforeclosure short sale transaction construct, etc.