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  1. #1
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    Question Deed in Lieu of Foreclosure and Tax Obligations

    Good afternoon,

    I completed a deed in lieu of foreclosure in 2013 (Dec 17) in the state of Virginia; after speaking with the lender, I will not receive a 1099-C until 2014. The Mortgage Debt Relief Act expired on 31 Dec 2013.

    Because the transaction took place in 2013, I want to confirm I am not liable for paying taxes even though I will not get my 1099-C until 2014, correct ?

    Thank you.

  2. #2
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    Default Re: Deed in Lieu of Foreclosure and Tax Obligations

    I'll assume that there's no question that the amount forgiven qualifies under the Act. As the event have occurred during the 2013 calendar year, the Act applies.

  3. #3
    Join Date
    Sep 2013
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    Default Re: Deed in Lieu of Foreclosure and Tax Obligations

    Quote Quoting Mr. Knowitall
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    I'll assume that there's no question that the amount forgiven qualifies under the Act. As the event have occurred during the 2013 calendar year, the Act applies.
    I am uncertain if that is the case. The event may have irrevocably occurred after the objection period. (15 days?)

    OP, why did the bank say they would issue the 1099 in 2014? That you would receive it in 2014 or that it would be for 2014?

  4. #4
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    Oct 2006
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    Default Re: Deed in Lieu of Foreclosure and Tax Obligations

    Quote Quoting Welfarelvr
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    I am uncertain if that is the case. The event may have irrevocably occurred after the objection period. (15 days?)

    OP, why did the bank say they would issue the 1099 in 2014? That you would receive it in 2014 or that it would be for 2014?
    I am also uncertain. It would take some research I would think to determine when the debt was officially cancelled. It would also be a bit of a fight with the IRS if they receive a 2014 1099-C and nothing is reported on the OP's 2014 tax return.

  5. #5
    Join Date
    Sep 2013
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    833

    Default Re: Deed in Lieu of Foreclosure and Tax Obligations

    From http://cperesources.com/storage/Debt...Washington.pdf
    However, the key event is the transfer of title and the risks and
    responsibilities of ownership away from the holder of the property with a
    termination of the debtor’s interest in the property. If property transfers to the
    mortgage holder in the proceedings and it moves beyond the ability of the
    debtor to obtain the property back, then a later sale by the mortgage holder
    will not control the recognition date or amount recognized [see, for instance,
    Davidson v. Commissioner, TC Memo 1977-14].
    If the taxpayer surrenders the property back to the lender, either under a
    deed in lieu of foreclosure or via an abandonment, the transaction is treated
    for tax purposes in the same manner as a foreclosure. [Revenue Ruling 90-
    16]. While generally it will be fairly easy to determine the effective date of a
    deed in lieu of foreclosure, determining the effective date of an abandonment
    may be more difficult.
    Which, of course, does not really answer the question. What I cannot find is if Virginia law has the moment of signing of the deed be the irrevocable period of transfer where it is beyond the ability of the debtor to obtain the property back, or is there a period (like some other states) where there is an objection period. Since I cannot easily find the answer I am beginning to think it may be at the signing of the deed, but, am still uncertain.

    (I guess part of our answer comes if the OP explains what "completed a deed in lieu of foreclosure" means. Does that mean when the contract was signed, or when the deed was signed?)

  6. #6
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    Default Re: Deed in Lieu of Foreclosure and Tax Obligations

    If the event did not occur in 2013, then the amount forgiven would not qualify under the Act. If the OP doesn't know when the event occurred, he needs to share more facts or consult a tax professional.

  7. #7
    Join Date
    Nov 2013
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    128

    Default Re: Deed in Lieu of Foreclosure and Tax Obligations

    Quote Quoting Carrie Ann
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    Good afternoon,

    I completed a deed in lieu of foreclosure in 2013 (Dec 17) in the state of Virginia; after speaking with the lender, I will not receive a 1099-C until 2014. The Mortgage Debt Relief Act expired on 31 Dec 2013.

    Because the transaction took place in 2013, I want to confirm I am not liable for paying taxes even though I will not get my 1099-C until 2014, correct ?

    Thank you.
    Was this loan a non-recourse loan ? And on a principal residence ? If so, I believe that you do not need to worry about paying taxes, regardless of when the DIL was completed.

    Please check this here :

    http://www.irs.gov/Individuals/The-M...-Cancellation-

  8. #8
    Join Date
    Oct 2006
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    Default Re: Deed in Lieu of Foreclosure and Tax Obligations

    Quote Quoting TroubledHell
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    Was this loan a non-recourse loan ? And on a principal residence ? If so, I believe that you do not need to worry about paying taxes, regardless of when the DIL was completed.

    Please check this here :

    http://www.irs.gov/Individuals/The-M...-Cancellation-
    The whole reason this thread started is because the Mortgage Forgiveness-Debt-Relief-Act expired on 12/31/2013...and no ones knows if Congress will decide to bring it back.

  9. #9
    Join Date
    Nov 2013
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    128

    Default Re: Deed in Lieu of Foreclosure and Tax Obligations

    Quote Quoting llworking
    View Post
    The whole reason this thread started is because the Mortgage Forgiveness-Debt-Relief-Act expired on 12/31/2013...and no ones knows if Congress will decide to bring it back.
    It appears that if a former homeowner is insolvent, they won't be liable to pay the "phantom income" tax. I assumed - probably wrongly - that non recourse debt on a principal residence would never be subject to this tax. Essentially, you borrow money to buy a home, cannot make payments, and the bank takes the home back. Thus, there is no "income" to be realized, whereas a refinance or HELOC would be a different animal than a purchase money loan and hence subject to this tax. I could have misunderstood, of course.

    In the meantime, I came across this :

    http://www.irs.gov/pub/irs-pdf/p4681.pdf#page11

    Note the example on homeowner "Timothy".

  10. #10
    Join Date
    Sep 2013
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    833

    Default Re: Deed in Lieu of Foreclosure and Tax Obligations

    Quote Quoting TroubledHell
    View Post
    It appears that if a former homeowner is insolvent, they won't be liable to pay the "phantom income" tax. I assumed - probably wrongly - that non recourse debt on a principal residence would never be subject to this tax. Essentially, you borrow money to buy a home, cannot make payments, and the bank takes the home back. Thus, there is no "income" to be realized, whereas a refinance or HELOC would be a different animal than a purchase money loan and hence subject to this tax. I could have misunderstood, of course.
    Generally, if the loan were non-recourse, a deed-in-lieu would be treated as a sale for the amount of the loan outstanding. Because of the way the question was worded implicating the home mortgage forgiveness act, the capital gain, if any, would be subject to exclusion by Section 121.

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