If you own a home in Florida, can't sell it, and do a deed in lieu of foreclosure. Can that be claimed on tax

Question

Do to all of the things going on in Florida, could not sell the home.
I gave it back to the bank with a deed in lieu of foreclosure. Can the amount lost on the home, be taken off of next years taxes, or broken down into several years of taxes?

Answer 1

Actually you have asked a question that perhaps should be looked into before you persue the deed in lieu. There may be a tax impact and you will want to have the package that you did with the bank-including hardship letter when you speak with your tax preparer this year. The impact may well be the reverse of what you expect-they may consider it income! so you have to present the package and request a review. There are IRS tax attorneies who specialize in helping with this issue or you may just take the package that you successfully submitted to the bank-including all of the financial info and visit the closest IRS office to apply for a review or this transaction. Good luck! At least with the bank approving the Deed in lieu I know that you have been able to provide enough proof to satisfy them. You are on the right path to be able to satisfy the IRS as well. Be sure to take all of the documentation either way you go! It just saves time.

Answer 2

From a tax perspective a foreclosure is handled EXACTLY the same as any other sale. Whatever the bank sells it for (or the balance of the loan if it doesn't sell to a 3rd party, most don't) is the net proceeds. Subtract your adjusted basis -- cost plus any improvements -- from the net proceeds to arrive at any gain or loss. Any gain may be taxable or may qualify for the exclusion if you meet the tests to exclude the gain. Any loss is NOT deductible for a personal residence.

Notice that I didn't say anything about the loans in arriving at the calculation of any gain. That's because it doesn't matter how much you owe on the house when it comes to figuring any gain or loss on the sale. It's ENTIRELY possible to owe more than the home is worth AND have a taxable gain on the foreclosure. I've seen it many times.

Where the loan comes in to play is if any portion of your debt is forgiven as part of the foreclosure. If your mortgage is a non-recourse mortgage there is nothing to worry about with that as the sale of the home wipes the slate clean. However if your mortgage is a recourse mortgage, any remaining debt MAY be taxable income to you if the debt is forgiven by the lender. You can dodge the tax bullet on that IF you are insolvent at the time of the cancellation of debt (COD). You are considered insolvent either if you file bankruptcy OR if your total liabilities exceed the FMV of your assets. In that case, any gain from the fogiveness of the debt is limited by the amount of your insolvency.

The calculations and ramifications of a foreclosure can get tricky. You'd be wise to consult with a local tax professional (a CPA, enrolled agent, or tax attorney, not a part-timer at a storefront tax prep mill) to see where you stand. In the worst possible case you could have a taxable gain on the foreclosure sale as well as a large taxable COD income to deal with.

Answer 3

There are some good answers here..but a few important key questions need to be answered before they should be responding..like..was this your primary residence or was this an investment property?, etc. Your best bet would be to hire a GOOD creative CPA. Don't just go to a H & R, ask around and find a good accountant , pay the few hundred dollars, and get some good advise. If you call now before they get too busy because end of the year taxes, you might even get this answered over the phone for nothing. Good luck!

Answer 4

You might be in for a nasty surprise. If the lender took back the house at less than the market rate and your debt was not completely covered by this. And if the lender did not make you pay back the rest but "forgave" you the debt.

This "forgiven" debt is actually taxable.

Just when you thought things couldn't get worse.

Answer 5

it all depends what the bank gets for your home. if they sell it for less than the amount owed on it you could have a tax liability unless congress passes the bill this year to eliminate this.

you can never claim a loss on personal property only a gain.

Answer 6

Yes it could. When you gave them back the deed, did you sign anything? I would read it carefully. Some will, some won't, alot depends on what they are able to sell it for.