Deed in Lieu on a Rental Property

[Yaya10xs]

I purchased a Condominium Unit in 2005 for $489,000 as a primary residence.Because of various circumstances, I moved out and started renting the property in 2011. Because of my health, I eventually stopped renting the unit in June of 2019. My health continued to decline and my mortgage company accepted a Deed-In_Lieu and we closed that transaction in October of 2019. The outstanding principal balance was $379,000.There was an Exhibit "B" with the DIL that states "That the consideration for said deed was and is payment to affiants of the sum of $1.00 by (Mortgage Holder) to forbear taking any action against affiants to collect on the obligations secured by the mortgage...and to not seek, obtain or permit a deficiency judgement against affiants....At the time of making said deed in lieu affiants believed and now believe that the aforesaid consideration therefore represents the fair value of the property so deeded, or more."

The Lender did not issue at 1099-C or 1099-A or 1099-S.  I contacted the lender and asked if they were going to send me something so I could file my taxes. No one will return my call or respond to an email. 

When I complete my tax forms do I use $379,000 as the fair value or the $1 they show as fair value in the documents? Is $379,000 income? What does the $1 have to do with anything? Thank you.

[JamesG1]

Zillow, Trulia or a real estate professional may be able to give you the fair market value of the property in October of 2019.  Make sure that you keep a paper copy of whatever you used to justify your fair market value declaration.

It sounds like you are reporting a 'sale' of rental property but there is no 1099-C, etc paperwork available to establish valuation.  If your loan of $379,000 was forgiven, that could be income to you.

Do not use the $1 figure.  I am not a lawyer, but I understand that the $1 consideration clause allows a legal agreement to be deemed legally binding.  

[Carl]

First, understand that I am not a tax professional, real estate professional, or banking professional by any stretch of the imagination. Additionally, all you've provided is a small snippet of whatever legal papers were completed by you in the bank, for this transaction.

Overall, it appears to me you have nothing to report on your tax return at all. The only thing you need to do is to show that the rental property and all assets were removed from service and disposed of by having "given it away", and that's it. You're done. There is no tax consequence on your 2019 return, one way or the other.

However, that doesn't mean there will not be a tax consequence in 2020 or a future tax year. All that snipped that you included in your post tells me, is that the lender has agreed to not go after you or your personal assets for collection of the mount you still owe on the loan, which I understand to be $379,000. In other words, the lender has "forgiven" that $379,000 and you don't have to repay it.

However, since you get to keep that borrowed money it's no longer borrowed money. It's "your" money now. (The fact you used it to buy a house with doesn't matter.) and you may have to pay taxes on that money. It just depends. Here's how this usually works on a voluntary foreclosure.

The bank will attempt to sell the property for the most they can sell it for. If they sell it for more than what you owed on it, then after the bank adds their fees to the amount you owe, if there's any money left over they are required by law to give that overage to you. It's also taxable income to you in the year they pay you that overage.

If the bank sells the property for less than what you owe on it, then the difference between what they sell it for and what you owe on it, is taxable income to you. If that happens, then in whatever year they sell the propery the lender will send you a 1099-C for the difference. You'll be required to report that 1099-C on your tax return and pay taxes on it. Since the property was not your primary residence at the time you elected the voluntary foreclosure, you will not qualify to be exempt from paying taxes on it under any forgiveness program.

So while the bank may have agreed in writing to not attempt any collection from you, it's a sure fire bet the IRS is going to get their cut any way you look at it.

[NCperson · Accepted solution]

it's not a taxable event and no need to report.  the legal language you quoted indicates the loan is non-recourse to you, meaning they can not come after you for any loss they experienced once they sold the property.  (I saw @Carl as I was typing out this reply)

Google  "Further Consolidated Appropriations Act, 2020".  cancelled mortgage debt is not considered taxable (through 2021)

the other issue that you might need to address (and this is beyond me), whether there is recapture tax to pay since the property was rental and was depreciated for a period of time.  That might create a need to report the sale, but the DIL without this issue need not be reported. 

it is possible that the fair market value of the property was $379,000 as the lender was willing to cancel the debt of $379,000 in trade for the asset.  

So the DIL itself is not a taxable event; however, whether there is recapture tax on the depreciation is the open question.