52,000. I can no longer make the mortgage payment and have not since July of 2011. I do not live in the house, I have relocated. There is someonee staying there to keep it safe.
With a deed in lieu of foreclosure, you give your home to the lender in exchange for lender canceling the loan. The lender promises not to initiate foreclosure proceedings and to terminate foreclosure proceedings, if any. A deed in lieu of foreclosure is probably going to look better on your credit report than a foreclosure or bankruptcy. However, there are a few caveats if you are the borrower:
First, getting a lender to accept a deed in lieu of foreclosure is difficult these days. Some lenders might accept a deed in lieu rather than incur foreclosure expenses. However, many lenders want cash, not real estate, especially if they already own hundreds of other foreclosed properties. Moveover, lenders may not want to accept a voluntary conveyance if outstanding liens or judgments against the property exist because such situations would force the lender to incur additional expense and time to obtain clear title. Furthermore, the lender may not agree to a voluntary conveyance if there are environmental issues because the lender could become primarily liable for future cleanup costs.
Secondly, usually before a lender will accept a deed in lieu of foreclosure, the lender will probably require you to put your home on the market for a certain period of time (usually 90 days). Lenders would rather you try to sell your house yourself rather than have you simply hand over the title.
Thirdly, if you are going to proceed with this route, you should make sure that the lender agrees in writing to forgive any deficiency on the loan that is not covered by the sale proceeds after the bank sells your house. Typically, this release is contained in the settlement agreement (agreement in lieu of foreclosure).
Finally, beware that there are potential tax consequences with a deed in lieu of foreclosure (as with short sales). You might be liable to pay income tax on the forgiven debt. However, under the federal Mortgage Debt Forgiveness Tax Relief Act of 2007 (applicable till the end of 2012), you might not need to pay any income tax on canceled debt (which is the unpaid loan balance that is forgiven by lender) resulting from a deed in lieu if you as the borrower satisfy certain conditions for mortgage tax relief (e.g., primary residence, owned for at least 2 years, debt amount of $2 million or less).
Frank W. Chen is licensed to practice law in the State of California. The information presented here is general in nature and is not intended, nor should be construed, as legal advice. This posting does not create any attorney-client relationship with the author. For specific advice about your particular situation, consult your own attorney.
Contact the lender to request this arrangement. If they won't agree, then perhaps a short-sale could be possible. Do not delay. The longer nothing is done the more likely the outcome will be a foreclosure.
First and foremost - lets set the record straight. Whether you lose your home through a deed-in-lieu of foreclosure, through a short sale or through a foreclosure, the tax consequences are identical. All are considered a sale, and all are treated identically as to whether there is any gain or loss on sale.
If the home was a primary residence, and not an investment property, then there is no deductible tax loss on the sale. Gain would be excluded up to $250,000 single, $500,000 married.
Since you do not live in the home, I take it that it has been a rental. Therefore, you would have a reportable gain or loss on the sale, depending upon what you paid for the house. On the prices you are quoting, I'm going to guess you lost money on this investment, therefore you should have a loss that you can right off on your taxes.
The other issue is that of cancellation of debt income. The IRS does not tax as income money received from a loan. But if your lender writes off part of the loan, the IRS does consider this income. You can bet your boots that the bank will send you a 1099 for the amount of loan it did not get back. It does this so it can write off its loss.
If this was your personal residence, and the loan was the original purchase loan, or the part of the refinance that paid of the original purchase loan, plus improvements, then that portion of the 1099 would be exempt form income tax - at leaast until the end of 2012. For those who had homes from the 1990s or early 2000s and were serial refinancers, then they will likely have to pay taxes on some part of the 1099 cancellation of debt income. This in and of itself might be a good reason to file bankruptcy - to have the loan discharged in bankruptcy to avoid tax on the loss of your home.
If this is the rental I suspect it is, then the residential exclusion does not apply. However, since you have a loss on the sale, this will most likely offset your income from the 1099 cancellation of debt income. In fact, you may still end up with a net loss depending on what you paid for the house.
Now, taxes aside, whether you lose your home through a deed-in-lieu of foreclosure, through a short sale or through a foreclosure, the hit on your credit report is virtually identical. You will lose almost the same amount of score regardless of the method you use to walk away from your mortgage.
The current underwriting guidelines for Fannie Mae and Freddie Mac currently will allow you to get a loan for a new home in 2 years if you deed-in-lieu or short sale. But they may not be around in 2 years. The VA will currently give a loan 2 years after a foreclosure, the FHA 3 years and conventional mortgages 4 years after a foreclosure. This is the main difference between and deed-in-lieu or short sale vs foreclosure. And these differences are subject to change at any time.
Anyway, most lenders are shying away for the deed-in-lieu as it does not clear the title the way a short sale or foreclosure will. You may be better off just letting the lender foreclose on the home.
Realtors want to short sale the home so they can earn a commission. Bankruptcy attorneys want you to file bankruptcy so they can earn their fee. Neither may be in your best interest. You should pay for an hour of a real estate attorney's time to go through your options and their consequences before making your decision on your course of action. The tax issues alone make this a smart thing to do.
www.michielawfirm.com I guess I wouldnâ€™t feel lawyerly unless I wrote a disclaimer to this answer â€“ after all, thatâ€™s what we lawyers are trained to do. So here it is. Disclaimer: Trying to provide a complete answer to a brief question without meeting the questioner and without getting all the facts is much like internet dating. Despite what you have been told by the person youâ€™ve met online (and donâ€™t they always put everything in the best light for themselves), once you meet them face to face you realize how much has been left out. People tend to bend the facts and there is always the other side to the story. So, this answer is about as valuable as the price that was paid for it. It should not be considered legal advice. It is meant as a general overview of how the law could apply to a very broad set of facts that may not have any applicability to the actual circumstances of the person making the question. It is hoped to provide some understanding of the broad field of law that could come into play. No attorney-client relationship has been formed with the questioner and no attorney client relationship was ever anticipated by my response to this question. I would also like to remind you that I am only licensed in the State of California, and the answer provided is based upon my knowledge of California law.
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