Tax Break for Mortgage Debt Forgiveness

when a mortgage company agrees to take a deed in lieu of foreclosure, does the balance of the loan become income to the owner or the amount only for which it sold at which is more than the balance of the mortgage?

Hi gina!

In case of a deed-in-lieu foreclosure, the lender will sell the property and try to recover the debts. The amount that the lender recovers from the sale of the property will be considered as lender's income. However, if the lender forgives the deficient amount resulting from the sale of the property, then it will be considered as your income and you will have to pay taxes for it.

Thanks,

Jerry

paid 300,000.00 for the house here in vegas my zip is 89031 which makes it worse according to agent if i short sale will be lucky to get 130,000.00 for the home. i am not behind very current . have a 7 year non adjustable arm interest only with 3.5 tears left. cannot refinance .. would rather just give the house back but am scared they (lender) or the government come back after the money or tax on the supposed income. wife just had brain surgery she is fine but other health issues arise. because of our occupations we are down almost 30,000.00 in income this year is there someone i can contact to discuss what the best resource is. the hope program according to them will not work for me because i am current and there is time left on the loan. apparently if you tried to do it right you can not be helped no need to argue with them will not get anywhere do not want to file bankruptcy!!! any advice is appreciated

thank you

hi joe!

have you spoken to the lender about short sale? you can check if the lender will offer that to you. you can also check the option of deed-in-lieu with the lender. this is similar to short sale but in dil, the lender may forgive the deficient amount.

you can also speak to the lender about loan modification. in this process, the lender will give you an alternative payment plan through which you will be able to pay off the mortgage.

if none of this works in your favor, then you can file chapter 13 bankruptcy. though you have mentioned that you don't want to file it, chapter 13 can be your last option. this will help you in re-organizing your debts. the lender will give you a repayment plan through which you will be able to pay off the debts within 3-5 years. moreover if you keep on making the payments, your credit will also improve. the most important thing is that you will be able to save your property.

thanks,

jerry

If you do not pay off the debt and walk away, the lenders can obtain deficiency judgement against you and garnish your wages. But normally they do not do that as obtaining a judgement can be expensive and time consuming and the lenders also know that little can be recovered from a person whose property has already been foreclosed.

If the house I am having trouble with is an investment property gone wrong due to the economy, if I should process a deed in lieu of, will I have to pay the taxes on the difference or is that included in Shane's message?

Hi Mirtha,

In case of a deed in lieu, the deficient amount is forgiven and this is considered as your income which is why you are required to pay tax on it. But there are exemptions as mentioned in Shane's message.

My husband and I are not able to keep up the payments on our home becuse of illness and downsizing. The 2nd mortage is 1 payment behind and the 1st mortage is 3 paymts behind. Should we consider a Deed in Leiu

My husband and I are not able to keep up the payments on our home becuse of illness and downsizing. The 2nd mortage is 1 payment behind and the 1st mortage is 3 paymts behind. Should we consider a Deed in Leiu Will it be publicized in the newspaper? Will people know?

A few years ago, my dad decided to transfer the mortgage under my name while cashing all the equity in our house (So practically, he sold it to me). The deal was, he will still be paying most of the mortgage while I can go and move out on my own. I decided to stay to help and unfortunately, my dad decided to leave my mom for another woman and left me with the mortgage all on my own. (I know, I was stupid for trusting my own father).

Anyway, I have been trying to sell my house but it's been tough. Now I'm underwater and considering a short sale. I haven't missed any mortgage payments yet but I'm afraid that I will have to sooner or later (he also left a lot of credit card debt under my name). Is short sale a good option for me? How will this affect my credit? I just really want to get out of this house, for financial and emotional reasons. Your advice is greatly appreciated. Thanks.

Hi Mary,

A short sale, indeed, would be a good option in this situation. This will affect your credit by almost 75 to 100 points, as opposed to 250 points in a foreclosure or a deed in lieu. However, you are required to pay off the deficient amount due to the short sale.

Thanks,

Jerry

Update

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I just got an offer on my house for 365k

What I owe is:
1st mortgage: 385k
HELOC: 40k

My real estate lawyer said that there's a possibility that the short sale can be approved if I proved that my incoming is less than my outgoing expenses. He also said that whatever the bank is forgiving is non-taxable because it's my primary residence.

Is this accurate?

Hi Mary,

That is right. If you can show your income to be less than your outgoing expenses, you have a fair chance of getting the shorts sale approved by the bank. You may not have to pay taxes on the forgiven amount under the mortgage forgiveness debt relief act as it is your primary residence.

I have a house that i had to stop making payments. I haven't paid since february. They won't foreclose. I am going to send them the deed in leu of. What are the problems that i will have besides my credit?