Deed in Lieu of Foreclosure...Need HELP please

[nwtaxlady]

Gretel...no that is not the case...

I believe where the confusion is is that they would get all the cash for their residence (tax free if lived there 2 out of 5 years) in your scenario to make your point more clear. In a way it is a wash. So putting the mortgage on a house and then having the debt forgiven but no cash from sales of house comes pretty much down to the same. Just my thoughts.

No...I think you are missing the point.
They took the equity $80,000 out of the house that they did the "Deed in Lieu of Foreclosure" and used this $80,000 on a NEW house which they live in now with NO mortgage payment. So they got $80,000 FREE $$ Money! Has nothing to do with them living there 2 out of 5 years. If you read my original post...their is a difference in Equity debt vs. acquisition debt.

[Gary2]

No...I think you are missing the point.
They took the equity $80,000 out of the house that they did the "Deed in Lieu of Foreclosure" and used this $80,000 on a NEW house which they live in now with NO mortgage payment. So they got $80,000 FREE $$ Money! Has nothing to do with them living there 2 out of 5 years. If you read my original post...their is a difference in Equity debt vs. acquisition debt.

No, it's not free money. It's money that they either invested into their previous home (either by paying down principal or making improvements) or that they earned through the increase in value of their home.

If the balance on the loan were only $120K, and they just sold the house to pay off the loan, would it bother you?

The only real free money is the canceled debt. And from the sounds of things, they're going to pay tax on it.

[nwtaxlady]

Gary2...

Client couldn't sell and ended up doing a "Deed in Lieu of Foreclosure". So here are the facts:

Cost Basis (purchase + improvements) = $132,837
Acquisition debt is ONLY = $46037
The rest of the debt is from multiple refinances taking equity out to pay off personal debt.
NOTE: $80,000 was used to put down on new personal residence

The 1099-A Form has in:

box 2 = $150,630 (Balance of principal outstanding)
box 4 = $139,900 (Fair market value of property)
box 5 = is X checked (Debtor personally liable for repayment of the debt)

So how is this treated? What do I do?

I just think it is wrong that their new house is free & clear because of this. I know their is a tax consequence here. I just need directions !!! THANKS!!

So my original post is above here. I understand when you sale a residence yes, it is $ from value increasing etc. But we are talking about canceled debt. There is not a problem is it was All Acquisition debt....then I have no problem with it. But since there is equity debt involved ($ NOT used to buy or improve the house), it is different than acquisition debt. I am talking about t he $80,000 that is NOT acquisition debt...it is EQUITY debt, personal debt (when $ not used to buy or improved this house). He just happened to use it to buy his next house. Which is irrelevant.

So think of it this way. I got have my house paid off. Once paid off you no longer have acquisition debt. I decide to take out a equity debt of $100,000 and give it to you. Then I turn around and do a "Deed in Lieu of Foreclosure". And so what happens to that EQUITY debt of $100,000 that was not use to buy build or improve the house?
Hey if there is no tax consequences then this is a good scam to jump on. That is what I am calling Free $$ Money. Do you see my point now? I can't believe there wouldn't be tax consequence on this Equity debt.

[Gary2]

So think of it this way. I got have my house paid off. Once paid off you no longer have acquisition debt. I decide to take out a equity debt of $100,000 and give it to you. Then I turn around and do a "Deed in Lieu of Foreclosure". And so what happens to that EQUITY debt of $100,000 that was not use to buy build or improve the house?

It gets paid off by the bank selling the house. That's $100K that you would have gotten if you'd sold the house yourself, without taking the equity loan (ignoring commissions and other selling expenses for now). You've lost the profit that would have been tax free.

In this case, I repeat that they'll almost certainly have to pay tax on the over $10K of COD income.

[nwtaxlady]

Gary2...thanks!

Ok...I see now. So then do I put the COD income on the 2011 return to cover my butt? Or no since there is no 1099-C for 2011?

What if they don't get a 1099-C in 2012, or at all?

Thanks for your help!!

[Gary2]

Ok...I see now. So then do I put the COD income on the 2011 return to cover my butt? Or no since there is no 1099-C for 2011?

What if they don't get a 1099-C in 2012, or at all?

Thanks for your help!!

Can you ask the client for the paperwork in which the lender agreed to the deed-in-lieu? That should indicate whether they agreed to cancel the remaining debt. Given these particular circumstances, it's entirely possible that the lender still expects to collect the remaining amount.

[nwtaxlady]

Gary2...

Can you ask the client for the paperwork in which the lender agreed to the deed-in-lieu? That should indicate whether they agreed to cancel the remaining debt. Given these particular circumstances, it's entirely possible that the lender still expects to collect the remaining amount.

Yes, I will request those papers. So if they agreed to cancel the remaining debt for turning over the deed to satisfy the debt, then does that mean NO 1099-C will be issued at all? And with that then no COD income?

I do apppreciate all your help!

[nwtaxlady]

Gary2...Deed in Lieu papers say...

Gary2... good news. The Deed in Lieu of Forclosure papers do state that "it prevents you from going through a foreclosure sale and it will release you from all responsibility to repay the mortgage debt."

With that said, then clients should not be receiving a 1099-C?

[Gary2]

Gary2... good news. The Deed in Lieu of Forclosure papers do state that "it prevents you from going through a foreclosure sale and it will release you from all responsibility to repay the mortgage debt."

With that said, then clients should not be receiving a 1099-C?

I don't know whether they'll get a 1099-C, but it certainly sounds like they have cancellation of debt income, which is potentially taxable.