deed in lieu affects taxes

If you do a deed in lieu of foreclosure, will you face a tax bite?

To the IRS, forgiveness of mortgage debt is taxable as is forgiveness of any debt. This makes sense if you think about it.

Say you get a mortgage loan for $100,000. A mortgage loan is not taxable. The money you receive is not income. (You may not receive the proceeds of the mortgage. More often they go to the seller directly, or they pay off the old mortgage. But for legal and tax purposes, it is as though the money went to you.)

You have to pay a mortgage loan back. But say in the future, your lender says "you don't need to pay this back anymore." Then, that $100,000 that was a loan is suddenly not a loan. Now it's income.

So people think they will face a tax bite, a huge one, and they wonder how deed in lieu affects taxes.

However, you will not necessarily face a tax liability of any kind of you do deed in lieu. For federal purposes, if you are insolvent at the time of a debt forgiveness, then you do not have a tax liability for that debt forgiveness. There is more to it, and this doesn't cover your state income tax situation. See your tax advisor and don't listen to anything you see posted here or anywhere on the Internet. And good luck.

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3 Comments on deed in lieu affects taxes

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