A Deed in Lieu of Foreclosure is a way to transfer ownership of a home to the mortgage company and avoid foreclosure. A Deed in Lieu is the legal conveyance of all interest in a real property by the mortgagor/borrower to the mortgagee/lender, in exchange for forgiveness of the defaulted mortgage. The Deed in Lieu is a way for both the borrower and lender to avoid costly and potentially lengthy foreclosure proceedings.
There is no guarantee that your mortgage company will accept a Deed in Lieu of Foreclosure. Both the homeowner and the mortgage company must enter into the transaction voluntarily and in good faith. Historically, lenders would not proceed with a Deed in Lieu if the outstanding balance on the mortgage exceeded the fair market value of the property. Today, however, lenders are increasingly accepting Deeds in Lieu to avoid the costly foreclosure process. Neither the borrower nor the lender is obligated to proceed with the Deed in Lieu until a final agreement is reached.
ADVANTAGES OF THE DEED IN LIEU OF FORECLOSURE
If you have defaulted on your mortgage and are considering surrendering your home, then you should communicate with your lender to determine whether a Deed in Lieu is an option for you. A Deed in Lieu allows you to transfer the property to your mortgage company, and your debt or deficiency will often be fully forgiven. In addition, a Deed in Lieu of foreclosure transaction is less damaging to a borrower’s credit than a foreclosure. Once the foreclosure process has begun, lenders have little incentive to accept a Deed in Lieu.
TAX IMPLICATIONS OF THE DEED IN LIEU OF FORECLOSURE
The IRS considers forgiven debt to be taxable income. Deeds in Lieu of Foreclosure are considered “debt cancellation income.” In some circumstances, income tax will be due on the debt cancellation income resulting from a Deed in Lieu. In most cases, however, you will not owe income tax as a result of a Deed in Lieu of Foreclosure.
If you are insolvent when the debt is cancelled, some or all of the cancelled debt will likely not be taxable to you. You are considered insolvent when the total of your debts is greater than the total of the fair market value of your assets. In some cases, insolvency can be fairly complex to determine. Most homeowners’ total net worth, however, is closely related to the equity in their homes. If the home that you are deeding to the mortgage company is under water (that is, you owe more on the mortgage than there is fair market equity) then you will likely be considered “insolvent” for tax purposes. Accordingly, for most homeowners, the Deed in Lieu of Foreclosure will not trigger tax liability.
BANKRUPTCY LAWYER IN D.C. AND VIRGINIA
You may have greater success in convincing your mortgage company to accept a Deed in Lieu of Foreclosure if you retain an attorney experienced in negotiating with mortgage companies. A good first step is to schedule a free consultation with a bankruptcy lawyer. Licensed in Washington, D.C. and Virginia, attorney Brian Lee can help you assess your financial options. Call 202-448-5136 or email bvlee@lee-legal.com.