We did a deed in lieu of foreclosure in 2014. Tax consequences?

February 6, 2015 12:58 PM

We did a deed in lieu of foreclosure in 2014. How will this effect our tax return?

My husband and I walked away from our house back in 2011. Fast forward to over two years later, in March of 2014, where we finally settled with a deed in lieu of foreclosure.

The house had an existing mortgage of $115k, but the house was sold as deed in lieu at it's appraised estimate of only $35k. (Real story, folks!)

We live in Florida, and recieved a form 1099-A in the mail from the company that finally let us close with the deed in lieu. (Bank of America's POS company is why it took so long, they sold our mortgage TWICE while we were processing).

I have no idea what this form is, or how this will effect our taxes, if any. Some people have said we will be on the hook for the difference and others have told me that the debt would be forgiven and will not make a difference on our taxes.

Anyone, especially in the tax biz, know if any of this is true?

We normally do our taxes ourselves but I need to know if I should go to a professional or what I can expect when we go.

posted by Sara_NOT_Sarah to Law & Government (4 answers total)

You need to go to a pro. A CPA, not a place where Liberty is standing outside with a sign. In many, many cases you ARE responsible for taxes on the amount of the forgiven mortgage.
posted by Ruthless Bunny at 1:08 PM on February 6, 2015 [1 favorite]

Oh! This is why when you're contemplating such an action you should get a bankruptcy attorney involved. They can help you mitigate your exposure. Bankruptcy can be a viable option for you.
posted by Ruthless Bunny at 1:10 PM on February 6, 2015

Here's the relevant IRS page, with links to the relevant IRS Publication. There are many factors at play here, so it's not really possible to answer your question.

However, be aware that the bank issues the 1099 based on IRS reporting requirements, which may or may not relate to whether you are still liable on the underlying debt. You do not want to pay tax on the forgiven amount only to find out you're still on the hook for the debt (there are a lot of other things floating around this statement, like whether the bank would then be estopped from pursuing it).

So, issues you'll want to find out:
-whether you're still liable for the remaining debt (this will depend on your transaction documents and state/federal laws)
-if so, how much
-is there a gain/loss to recognize on the deed in lieu of foreclosure transaction
-were you insolvent just prior to the forgiveness, and if so, by how much

If you end up not including it on your return (because you determine it is not CODI to you), you should include a statement with your return to that effect.
posted by melissasaurus at 1:29 PM on February 6, 2015

You will have a tax liability for the forgiven debt (basically considered income). The good news is that this generally means the bank will not be pursuing you for the deficiency.
posted by frednorton at 7:10 PM on February 6, 2015