Deed In Lieu of Foreclosure Completed - Tax ramifications?

[Kramer24Seven]

What is the name of your state (only U.S. law)? Florida

Hello All,

Last week, I signed off the papers on a Deed-In-Lieu-of-foreclosure with Citi Bank via a notary that came to my new location. The process was extremely smooth and took less than four months to complete. They inspected my house and it passed inspection. The bank approved the transaction and also provided me with a deficiency waiver. The Deficiency Waiver agreement states "Mortgagee HEREBY CANCELS all of the Borrower(s) obligations under that certain Note and Mortgage, Deed of Trust, or Security Deed, dated so and so, which Security Instrument covers the Property".

I owed $123,500.00 at the time I signed off on the papers. The fair value of the house was listed at the same value ($123,500) on the documents I signed off on in front of the notary.

In correspondence with Citi, the Deed In Lieu representative wrote that: "All borrowers who complete a deed in lieu will receive a 1099-A. A 1099-C is issued if the value of the property is less than the unpaid principal balance. We will not know completely which 1099 you will receive until they go out at the end of the year". He then added in a follow-up email that "You will receive a deficiency waiver regardless of which 1099 you receive as you are deeding
the property back to the investor and not fulfilling the payments of the loan. To simplify the 1099 answer, if you owe more than your property is worth, you will receive a 1099-C per IRS requirements."

If I am taking his words at face value, I am told that if I owe more than my property is worth, I will receive a 1099-C. From the documents I signed off on, the fair value of the house is listed at $123,500, the exact amount I still owed on my mortgage prior to receiving the Deficiency Waiver Agreement from Citi. Does this mean I am in the clear when it comes to tax issues (i.e., having to pay taxes on "income earned")? I would appreciate any thoughts on this matter, especially as it pertains to Florida Law and my tax obligations at this point.

Thank you for any assistance you can offer in this matter.

Yours,

DB

 

[davew128]

You really need to consult with a local tax professional.

a) I find it highly unlikely that the FMV of the property is exactly what you owe.
b) The tax treatment of the transaction is dependent upon state law regarding lender remedies on foreclosures. I could tell you how it would work in a couple states, but Florida isn't one of them.

 

[Kramer24Seven]

You really need to consult with a local tax professional.

a) I find it highly unlikely that the FMV of the property is exactly what you owe.
b) The tax treatment of the transaction is dependent upon state law regarding lender remedies on foreclosures. I could tell you how it would work in a couple states, but Florida isn't one of them.

Agreed. I will consult with a local tax professional. On Zillow, my house value is $110,000, but on the documents I signed from Citi, they state that the fair market value of the house is exactly what I owe the bank, and they state it clearly. In the case that the fair market value of the house is identical to the amount I owe on it, it would appear on the surface that I am in the clear in terms of tax liability, but I will need to check with a local tax professional. Any idea what the going rate for a half an hour consultation would be?

Thanks all,

DB

 

[FlyingRon]

If the bank consensually offered the amount of the loan for the deed, that IS the FMV at that point in time.

 

[LdiJ]

What is the name of your state (only U.S. law)? Florida

Hello All,

Last week, I signed off the papers on a Deed-In-Lieu-of-foreclosure with Citi Bank via a notary that came to my new location. The process was extremely smooth and took less than four months to complete. They inspected my house and it passed inspection. The bank approved the transaction and also provided me with a deficiency waiver. The Deficiency Waiver agreement states "Mortgagee HEREBY CANCELS all of the Borrower(s) obligations under that certain Note and Mortgage, Deed of Trust, or Security Deed, dated so and so, which Security Instrument covers the Property".

I owed $123,500.00 at the time I signed off on the papers. The fair value of the house was listed at the same value ($123,500) on the documents I signed off on in front of the notary.

In correspondence with Citi, the Deed In Lieu representative wrote that: "All borrowers who complete a deed in lieu will receive a 1099-A. A 1099-C is issued if the value of the property is less than the unpaid principal balance. We will not know completely which 1099 you will receive until they go out at the end of the year". He then added in a follow-up email that "You will receive a deficiency waiver regardless of which 1099 you receive as you are deeding
the property back to the investor and not fulfilling the payments of the loan. To simplify the 1099 answer, if you owe more than your property is worth, you will receive a 1099-C per IRS requirements."

If I am taking his words at face value, I am told that if I owe more than my property is worth, I will receive a 1099-C. From the documents I signed off on, the fair value of the house is listed at $123,500, the exact amount I still owed on my mortgage prior to receiving the Deficiency Waiver Agreement from Citi. Does this mean I am in the clear when it comes to tax issues (i.e., having to pay taxes on "income earned")? I would appreciate any thoughts on this matter, especially as it pertains to Florida Law and my tax obligations at this point.

Thank you for any assistance you can offer in this matter.

Yours,

DB

If you get a 1099-C and this was your primary residence (for at least two out of the last 5 years) then hopefully there will be no tax consequences. The 1099-C will have to be reported on your income tax return but should be able to be excluded. I am say "should" because I do not know at this point whether or not the act that allows this has or will be extended for 2014.

If this was not your primary residence then it gets a bit more complicated. You may have some capital gain (or perhaps even capital loss) depending on the exact details.

 

[Kramer24Seven]

If the bank consensually offered the amount of the loan for the deed, that IS the FMV at that point in time.

I reviewed the document copies of what I signed with the notary sent by Citi. Within the Warranty Deed, Bill of Sale, and Estoppel and Solvency Agreement, the fair market value is indeed $123,590, which is exactly what my balance on the mortgage was. Also, within the "Deed In Lieu of Foreclosure Agreement", Section 2 b and c state:

2b) Lender and Borrowers agree that the Indebtness is no less than $123,590.00 in principal, plus additional amounts for accrued but unpaid interest and attorney's fees owing by Borrowers to Lender

2c) Borrowers represent that they have made an independent determination of the fair market value of the Property, and as a result thereof, they have concluded that: the consideration to be received by Borrowers pursuant to the terms of this Agreement represents the payment by Lender of full, fair, and adequate consideration for the Property.

 

[tranquility]

What's the basis in the property?

Was there any cash for keys or other compensation to the OP?

Was the debt recourse or non-recourse?

 

[Kramer24Seven]

If you get a 1099-C and this was your primary residence (for at least two out of the last 5 years) then hopefully there will be no tax consequences. The 1099-C will have to be reported on your income tax return but should be able to be excluded. I am say "should" because I do not know at this point whether or not the act that allows this has or will be extended for 2014.

If this was not your primary residence then it gets a bit more complicated. You may have some capital gain (or perhaps even capital loss) depending on the exact details.

This was indeed my primary residence. My understanding was that if the FMV of the house was $95,000 in the eyes of the bank and I owed $125,000 on the mortgage, that would mean that to the IRS, I received an income of $30,000 that I have to report to them and pay taxes on. From years 2009 through 2012 (extended through 2013), this "income" would have been forgiven had this been my primary residence (which it was).

Since I am assuming the law is no longer on the books, I am hopeful that if the FMV as stated by the bank is identical to how much I owed them, I therefore did not earn any "income" since there was no negative difference between the FMV and the amount I owed.

Thanks for all your feedback. It has been greatly appreciated. I welcome more! : )

DB

 

[Kramer24Seven]

What's the basis in the property?

Was there any cash for keys or other compensation to the OP?

Was the debt recourse or non-recourse?

I don't understand the first question, but this was my primary residence that I walked away from to move in with my fiancee who owns her own house and lives much closer to where I work.

I was not given cash for keys. There was no other compensation given to me, as the house was already vacant and I began the DIL process upfront with the bank from the very beginning after consulting with a real estate attorney and concluding that the DIL was the best of several options available to me.

I can't answer whether the debt was recourse or non recourse, but in the DIL agreement, it states that:

"c) Lender shall not sue or take any other action to enforce the obligation of the Promissory Note of any rights which it has under the Loan Documents against Borrowers property, except insofar as it is necessary in a foreclosure action to clear title to the Property. Lender further agrees that it will not seek to procure the deficiency judgment against Borrowers for the amount by which the obligation exceeds the value of the Property. This shall be binding only on Lender or Lender's nominee"

I also have a Deficiency Waiver Agreement where Citi hereby cancels all of my obligations under the Note and Mortgage.

- DB

 

[tranquility]

Basis is, basically, what you paid for the property.

How long have you been out of the house before it was taken?

 

[Kramer24Seven]

Basis is, basically, what you paid for the property.

How long have you been out of the house before it was taken?

I took out a mortgage for $125,000 when I bought the house back in 2004. The mortgage was one of those 99% financed/1% down available to educators, so I only had $1,000 needed for the deposit to buy the house via the mortgage. There was a refi that took place in 2006 and then sometime in 2009-2011, the Bank and I entered into an agreement where a significant chunk of the principal was forgiven, reducing my total balance from $150,000 something to roughly $127,000 or so. I then made payments for one to two more years before I decided to walk away some time in late 2013. I stopped paying the mortgage in February of 2014 when I officially moved in with my fiancee.

I lived there for 10 years before moving in with my Fiancee officially in February of 2014. The bank essentially took over last week when I signed the papers at the end of July 2014 so it was vacant for roughly six months or so.

- DB

 

[tranquility]

See someone who can get all the original numbers accurately. It seems each question here results in new numbers and facts. The reporting will be a bit difficult.

It does not appear you will have much in either gains or COD income. It would be interesting to see how the original write-down was accomplished as this could be something that reduces your basis and result in some capital gain. (Which would probably be excluded.)

 

[davew128]

If the bank consensually offered the amount of the loan for the deed, that IS the FMV at that point in time.

Except thats not how it works. The decision to take the property isn't always based on the FMV of the property versus the outstanding balance. More importantly, the issue of recourse vs non-recourse (I'm betting its recourse) impacts the tax reporting.