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Tax ramifications of deed in lieu of foreclosure

Hi,

What is the tax ramification (by the IRS the state o CA) for a deed in leiu of foreclosure? Thanks

adonis's picture
adonis | Joined: October 22, 2005 05:04 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Welcome Jolly,

Once a deed in lieu foreclosure is accepted, the lender takes over the borrower's property and sells it off to get back the unpaid debt. But if the home sells at a price lower than the unpaid debt, then the deficit is the debt forgiven by the lender. This implies that the borrower need not pay for it and legally the lender cannot claim it. This unpaid debt becomes the basis of the tax that the borrower has to pay on account of the forgiven debt.

Just refer to our section on Deed-in-lieu to know more about the tax ramifications.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

IF loan balance is more than property's sale value & lender forgives the difference amount then this forgiven debt becomes taxable income for you (also called cancellation of debt income).

Lender then reports the forgiven debt to IRS and provides the borrower 1099-C form

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

That's right brack. If the taxes on the cancelled debt are not paid on time, the Internal Revenue service (IRS) may place a federal tax lien on your property.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

What happens in the case of a deceased person's estate when the property is given up in a [url=http://www.mortgagefit.com/deed-lieu.html]Deed in Lieu of foreclosure[/url] and there are no funds left in the estate.

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adonis's picture
adonis | Joined: October 22, 2005 05:04 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

The estate of a person includes real property as well as other assets. When you say, there are no funds in the estate, do you mean there are no assets? your question isn't clear, please clarify.

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Caron's picture
Caron | Joined: July 19, 2005 08:37 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Jc,

If a deceased person's estate is given away through a deed-in-lieu, the estate taxes to be paid by the heirs will depend upon the value of the estate minus the home value. The estate value will include assets such as insurance policies, etc.

However, as per the Mortgage Tax Relief Act, one need not pay tax on forgiven debt. Please check out a previous discussion on Tax break for debt forgiveness .

Good luck

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

What does this mean and is it necessary to obtain legal representation?

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larry2's picture
larry2 | Joined: June 27, 2007 02:50 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Russell.

Welcome to the forum. The homeowner who have faced the foreclosure, can claim the funds left after the foreclosure and paying off the lenders, taxes and all other fees. The legal representation of an attorney is always appreciable and he can help you to get the surplus money after the foreclosure. Feel free to ask if you have any further questions.

Best of luck,
Larry

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

The 1099 income reported to the IRS for a mortgage workout, such as a deed in lieu of foreclosure or a straight foreclosure is now, under certain circumstances for principal residence mortgages, not taxable. Read IRS Form 982 and the mortgage forgiveness debt relief act of 2007 on the Library of Congress website.

PS: >>...IAAL.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Help. I have moved out of a $444K house. I have a second with a private lending co. What is in store for me? I have savings of about $333K. Can they take everything I have? I'm retired and 66 years old.

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adonis's picture
adonis | Joined: October 22, 2005 05:04 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi tova,

As you have walked away from the property, the first lender will have the right to foreclose the property. If the foreclosure sale does not satisfy his loan, he will have the right to sue you for the deficient amount. He can also place a lien on your other property or garnish your savings account.

As far as your second loan is concerned, the second lender may charge off the loan to a collection agency who will collect the dues from you.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

inotice that you live in Alaska. Are the lawa the same in california?

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adonis's picture
adonis | Joined: October 22, 2005 05:04 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Welcome back tova,

Laws vary from state to state. I guess, you are from California. As far as I know, in California, the lenders cannot sue the borrowers for the deficient amount resulting from the sale of the property.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Need some help and advice! We are in jeopardy of a foreclosure!

We have a mortgage and a line of credit. We live in California and know that the first is a non-recourse loan. However, we heard that the line of credit could be a recourse loan. My question is what are the tax ramifications on the line of credit? Can the bank come after us?!!! Please help!

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jenkin7's picture
jenkin7 | Joined: June 4, 2007 11:02 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Angel,

[url=http://www.mortgagefit.com/second-mortgage.html]Second mortgage[/url] holders generally come after you for the deficiency. But you can negotiate with them and they usually accept a short pay off and settle the debt. A lot also depends on the anti deficiency laws of you state, which varies from one situation to another. As far as I know, California does have anti-deficiency laws to protect the borrowers from deficiency judgments. You can contact a local attorney and check if the laws can be applied in your situation to avoid such a judgment.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I have a home with 2 mortgages and a condo that I own with no mortgage.
I haved a 2nd home, it is rented and was an investment. The value is less than the mortgage by 100,00. Will my condo be in siezed if I do a dil on the 2nd home? I live in Florida.

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savior70's picture
savior70 | Joined: March 25, 2009 05:14 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi,

It is unlikely that your condo will be foreclosed if you do a deed in lieu on your second home. The condo has no mortgage on it and you own it outright, and I believe it is not used as collateral for the loan on the second home. In that case, there doesn't seem to be any chance of your condo being seized by the mortgage holder of the second home.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Angel,
I am just one of those who has been puzzled with the influx of information, so I will tell you what I found out so far.
If the line of credit was acquired when you purchesed your home (assuming it is you primary residence) from what I read all over the place is that it is considered the purchase money loan and there should be no federal tax ramifications for Carlifornia. Refer to the IRS publication 4681. But you might have to pay the California state tax on the forgiven debt, since California was only excluding the cancellation of debt from income during 2007 and 2008. I hope they extend it to 2009, otherwise we are in trouble..

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi, I see that if you want to go through with this, you need to write a letter stating your reasons....Well, my reasons are no other than this property did a 360 and now is a gut wrenching "ghetto", complete with daily gunshots and murders right outside my front door!!!! I was trying to raise children there but, unfortunately, we had to run for our lives...literally!! Anyway, my question is do I be completely honest with the mortgage company? Or do I omit that part of it? I'm afraid if I'm honest that they won't even think about taking it back!!!! Please Help Me!!!! Thanks so much!!!

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jenkin7's picture
jenkin7 | Joined: June 4, 2007 11:02 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi sleepinbeauty,

If you think the lender will not want to take back the property if you disclose all information about the property, you do not have to tell them everything. Tell them that you are in financial crisis and you want move into a different house. By the way, what have you planned to do? Do you want to do a short sale or a deed in lieu on the property?

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

My wife purchased a house in Alabama and the seller had a 1st Mortgage at the bank. The seller did a wrap-around mortage in 2007 with the bank and the banks attorney's knowledge and approval. My wife filed for homestead exemption in 2007. The bank and their attorney had the seller to sign them a [url=http://www.mortgagefit.com/deed-lieu.html]deed in lieu of foreclosure[/url] in Sept. 2008. This was done without our knowledge or approval until after the fact. The bank started contacting me and telling me it was a better deal for us to allow them to transfer property into our name. In Feb. 2009, I signed a mortgage and note with the bank. The bank notified me by email that they had been sent the tax statement for 2008. The amount was over double the homestead amount. I went to the court house and was advised that the bank had never recorded deed in my name. It was still in the banks name. I went and talked to the banker and he said that he had given me credit for the taxes on the closing statement but when he looked, he had not given me any credit. He attempted to call the attorney but he was not in and he said that he would call me back. Ove 36 hours and I have not heard from him.

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savior70's picture
savior70 | Joined: March 25, 2009 05:14 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi hstan,

It sounds strange that the banker told you he had changed the property deed in your wife's name, whereas no such deed was recorded. Since previous owner of the property was transferred the house to the banker through deed in lieu, the title to the property had been in the banker's name. But if he had indeed transferred the property to your wife, it should show on the public records. I think she should talk to a real estate attorney in this regard. Unless her name is on the property title, how would she claim her ownership rights to the property? She needs to find ways to put her name on the title and she also needs to know whether the lender had actually transferred the title in her name as they claim they have done.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

What are the tax consequences if I did a deed in lieu in the state of Florida since mortgage forgiveness debt relief act of 2007 is only good up until the end of 2009?

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jenkin7's picture
jenkin7 | Joined: June 4, 2007 11:02 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi question,

The Mortgage Forgiveness Debt Relief Act of 2007 is applicable to debts discharged in years 2007 through 2012. Thus, if you qualify for the tax exemption under the debt relief act, you do not have to pay any taxes on the amount of the cancelled debt. To know more on this you can refer to the IRS site at "http://www.irs.gov/individuals/article/0,,id=179414,00.html".

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Can NY borrowers (property is in Florida) be sued for the difference in the outstanding loan amount if the property sells for less?

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jerry's picture
jerry | Joined: October 17, 2005 03:24 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Patti,

In Florida, deficiency judgments are allowed in judicial foreclosures. If your property is foreclosed and the house sells for less than the loan amount owed, you will be responsible for the deficiency. Once the lender gets a deficiency judgment against you, they can garnish your wages, put liens on your other properties and come after your back accounts.

Thanks,

Jerry

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

i have lost my job a year ago times are tight and i am a month behind ...which is the better option for us we want out of our house .. we are willing to short sale if it will sell i do not think it will sell anyways because i live in flint michigan but i need to know what is a better path?

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savior70's picture
savior70 | Joined: March 25, 2009 05:14 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

To chief,

If you want to move out of this property, you can first try and short sell it. A short sale has a less damaging effect on your credit than a foreclosure. However, given the market situation, if it does not short sell you can request your lender to accept a deed in lieu of foreclosure.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

So if i have a vacation property purchased for $500K and the bank took it back as deed in lieu. They sent a form 1099 stating value as $200K and currently have it for sale for 300K. Is the value disputable?

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jenkin7's picture
jenkin7 | Joined: June 4, 2007 11:02 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi petey,

What value does the 1099 Form show as $200k? Is it the fair market value of the property? The fair market value does not necessarily have to be same as the price you bought this property for. Fair market value is an estimate of the current value of the property. Given the market condition, the fair market value of the property could well be far less than what it was purchased for years ago. However, you do not have to pay any taxes, if the fair market value of the property listed on the 1099 Form is more than the principal amount you owe.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

My Mom passed away with out a will, she owned 1/2 of a house and another person owns 1/2 of the same house. The owner who still resides in the home he co-owned with my Mom has since decided not to pay the mortgage and is about to go into foreclosure, my question is can the Bank go after the Estate of My Mom or since she is deceased it would then be the sole responsibility of the 1/2 owner who is now the whole owner of the property?

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savior70's picture
savior70 | Joined: March 25, 2009 05:14 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

To Jena,

The deceased borrower’s estate can be used to pay off the deceased’s debts. Thus, if the value of the home is not enough to pay off the mortgage, the lender can come after your mother-in-law's assets. However, since she is deceased now, it is the responsibility of her co-owner to pay off the mortgage. If he stops making the payments, the lender will first come after him to satisfy the lien. If the mortgage company cannot recover the loan balance from him, he can go after your mother-in-law's estate.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I am facing foreclousure after only being in my home only 1 1/2y rs. The homes in the subdivision where I live are selling for half the price of mine now. I live in the state of Florida. if i file forclosure what will I be responsible for as far as taxes. can they garnish my wages?

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jenkin7's picture
jenkin7 | Joined: June 4, 2007 11:02 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi DARLENE,

If your lender forecloses the property and there remains a deficiency, you will be responsible to pay it off. The lender can come after you and garnish your wages if he gets a judgment against you. In case the deficiency is forgiven, it will be seen as your income and you will have to pay taxes on the forgiven debt amount.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I am from Florida. My first and [url=http://www.mortgagefit.com/second-mortgage.html]second mortgage[/url] are held by BAC who has agreed to a deed-in-lieu. what happens to the second mortgage and is there a way to discharge it?

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sara's picture
sara | Joined: July 5, 2006 03:16 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Guest,

Though your property goes for a deed in lieu of foreclosure, you will remain liable for the second loan. It will not get discharged. If you do not pay the second mortgage, then the lender will charge off the loan and a collection agency will collect the dues from you.

Take care.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

if my home is foreclosed on can my disability income be attached for any monies that the property is sold for short of the payoff amount

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smith.sussane's picture
smith.sussane | Joined: September 18, 2008 09:57 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi marilyn!

Welcome to forums!

As far as I know, the lender will not be able to come after your disability income in order to recover the balance dues resulting from foreclosure.

Feel free to ask if you've further queries.

Sussane

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lisa.20.morrighu's picture
lisa.20.morrighu | Joined: July 14, 2010 09:47 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Since laws about much of this vary widely from state to state, I would encourage you to find a qualified attorney and get advice specific to both your situation and your location.

If you choose to call the IRS and discuss this with them, be sure to place at least 5 phone calls. The IRS doesn't guarantee their answers and stating that you called the IRS isn't a defense against tax proceedings. Oh, and bankruptcy doesn't wipe out tax debt either :/

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I have already moved out of my house. It was going through foreclosure; but I put the house on the market for sale. We had a buyer. The lender approved everything; thing the buyer backed out. I was told that I needed to fill out the papers for deed i lieu. Because I am trying to sell the house, can they deny me the deed in lieu?

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jameshogg's picture
jameshogg | Joined: December 20, 2005 02:58 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Sherry,

The lender will not deny you a deed in lieu of foreclosure just because you're planning to sell off the property. You should fill out the required documents as asked by the lender and apply for a deed in lieu of foreclosure.

Thanks

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I have noticed that all Short Sales, Deed in Lieu of Foreclosures and Foreclosures have three things in common:

1) You need to get out of the banks contract and give back the property.

2) You lose anywhere around 250 to 350 points on your credit report for up to 10 years.

3) If you have a house note of $500,000.00 and its worth only $250,000.00 now and the balance is not all recouped to pay off the note $250,000.00 isn't it usually recouped by the lien holder(bank), via legal means.

What is the difference of going bankrupt with a home?

Is it true that the lien holders (banks) that own your home are really forgiving the balance owed?

Somebody, please advise as to let me know if these items stated above are true or is there something I am missing as a whole.

Thank you,
MeMe

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

if i do not want the house is it better to take the modification and rent out the house or go ahead and take the hit of a deed in lieu, if lieu what are the ramifications in the state of Florida

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Niicss's picture
Niicss | Joined: October 3, 2005 11:54 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

To Guest,

A short sale will lower your score by 80-100 points, bankruptcy will lower your score by 200 points and deed in lieu of foreclosure will lower your scores by 250 points. In case of deed in lieu of foreclosure, you won't be liable for paying the deficient balance whereas in case of short sale, you'll be liable for paying the deficient balance. You should file bankruptcy only when you've various other debts apart from mortgage.

To gosia,

You can go for a deed in lieu of foreclosure in order to get rid of the property.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

What happens when you are a personal representaive of a deceased person estate (real property) there is no personal assets. The property is given back to the mortgage co, as a deed in lieu of foreclosure. There is not enough in the short sale of the property to cover the balance.?

Also due to heirs of which one can not be located. the mortgae company has ask the rep to file a petition with probate court for deed in lieu of foreclosure, can this be done?

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smith.sussane's picture
smith.sussane | Joined: September 18, 2008 09:57 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Tasha!

Welcome to forums!

Your query has been replied to in the given page: http://www.mortgagefit.com/know-how/about53059.html . Take a look at it. I hope it will help you.

Sussane

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi my husband did a loan modification on his home and they sent paper work out for him to sign the loan amount went up 20,000 more on the loan then the house is worth I wanted to know if it is best that he do a deed of leu because the payment didn't go down but 40 dollars difference and just start renting again and later purchase a home in my name since the home is in his name

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jameshogg's picture
jameshogg | Joined: December 20, 2005 02:58 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi anita,

A [url=http://www.mortgagefit.com/deed-lieu.html]deed in lieu of foreclosure[/url] is a good option to get rid of the property. You won't be liable for paying off the deficient balance resulting from the sale of the property. However, it will lower your scores by 250 points.

Thanks

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

see subject

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jameshogg's picture
jameshogg | Joined: December 20, 2005 02:58 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Joan,

Contact a tax adviser and he will assist you in this matter.

Thanks

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