Deed in Lieu is Debt Relief too… - Posted by JT-IN
Posted by JT-IN on January 18, 2007 at 19:26:35:
And can be a taxable event. Foreclosure can also be taxable event. Debt relief is debt relief, no matter how it is packaged. Short sale has no corner on the market of debt relief.
You would be best served to understand the consequences of Debt Relief, and you can do so by internalizing the data in IRS Publication 544, page 5.
What is best is to have the homeowner seek tax advice from a competent tax adviser. What I do is offer to explain this to them, and then offer to have my CPA, at my expense, prepare their taxes in the year of the short sale… This seems to get you beyond that point. I also have homeowner sign a disclosure that says that they are NOT relying on my advice as to taxes, and I have recommended they seek competent tax advice.
Just because the homeowner gets a 1099, does not mean that the amount of debt forgiveness is taxable. In fact in most cases it is NOT taxable. Most folks that qualify for a short sale will meet the test of the forgiveness of debt escaping taxation on the forgiven amount. Generalization, but it is usually the case. Lenders are not in the business of forgiving debt that is otherwise collectible… If the homeowner has a negative net worth, prior to the debt forgiveness, this will eliminate taxing from being owed on either a short sale, deed in lieu or a foreclosure. It is measured prior to debt relief, and has nothing to do with where they stand after relief.