How JustAnswer Works:
  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.
Ask TJ, Esq. Your Own Question
TJ, Esq.
TJ, Esq., Attorney
Category: Real Estate Law
Satisfied Customers: 12249
Experience:  JD, MBA
Type Your Real Estate Law Question Here...
TJ, Esq. is online now
A new question is answered every 9 seconds

My former home is now used as a rental property and is underwater.

This answer was rated:

My former home is now used as a rental property and is underwater. I am doing a deed in lieu, the agreement says "mortgage is hereby cancels and forgives all the borrowers obligations under the security instrument that covers the property. Its says the mortgagee will issue an IRS 1099 for the reminaing loan balance and notifiy the credit bureau to reflect a deed in lieu foreclosure on borrowers credit. My question is do I owe taxes on this home. I owed 145,000. Its real estate value was about 100,000.
Hello and thank you for the opportunity to assist you. My name is XXXXX XXXXX I will do my very best to answer your legal questions.

Q: My question is do I owe taxes on this home. I owed 145,000. Its real estate value was about 100,000.

A: Unfortunately, you do potentially face tax liability. If the fair market value of the property is $100k, and the mortgage is $145k, that means $45k was forgiven. The IRS taxes forgiven debt as income. In other words, once the obligation to repay a loan is removed, then it is no longer a loan ... it is just income. Congress did pass a law that relieves homeowners of tax liability for forgiven mortgage debt ... but only if the house was the taxpayer's principle residence in the year in which the tax relief is given. In this case, since you rent the property, you would not qualify for the relief. So, it sounds like you'll have to pay income taxes on the $45k (note: your taxes wouldn't be $45k ... but you would be taxed on the $45k just as if you had gotten a $45k bonus at work).

I am truly sorry to give you this bad news, but please understand that it would be unfair to you (and unprofessional of me) to provide you with anything less than an honest response. However, if your concerns were not satisfactorily addressed, then please let me know, and I will be happy to clarify my answer. I do ask that you rate me based upon whether I answered your question, and not based upon whether the answer was good news or bad news. Your positive feedback is greatly appreciated. Thank you for using our service!

If you would like to direct additional legal questions to me in the future, then please type "To TJ, Esq." in the subject line of your question.
Customer: replied 3 years ago.

In regards XXXXX XXXXX tax liability of 45,000, are their losses, things to depreicate, etc, that can reduce that gain??

Hi again.

Just to clarify, you wouldn't have tax liability of $45k. You would pay taxes on the $45k. Depending on your tax bracket, the amount you owe the IRS may be anything from roughly $4000 to $18,000. That tax liability can certainly be offset if you have losses.

One way you may be able to reduce that gain right from the start is to show that the property is worth less than what is claimed on the 1099. For example, if the house is in terrible shape, then it may be worthwhile to have an appraiser look at the house, and then work out an agreement with the lender as to the fair market value.

I hope that helps. Please let me know if you need clarification.
Customer: replied 3 years ago.

Now I am confused, sorry. I owe, 145,000 and the as yet fair market value I don't know. It was appraised at 100,000 when I was try to sell it, and the mortage company wouldn't accept an offer less than 110,000. What I owe less the house value, I think I get. If the house is appraised as less I am not following how that doesn't increase what I owe. Will I know what is claimed on the 1099 very soon, or do I have to wait to recieve it in January. Hope I haven't confused you now

Hello again.

My apologies, as I did get you a bit mixed up. You're correct that it would be better for you if the house is worth more. Accordingly, you'd want the appraisal to be higher rather than lower. That would reduce the amount forgiven, and thus, your tax liability. In my prior answer, please disregard where I wrote that you'd want the house to be in terrible shape. Rather, you'd want the house to be in great shape.

You'll need to wait to receive the 1099 in January, unless the lender agrees to discuss this issue with you in advance. The botXXXXX XXXXXne is that you can certainly contact the lender and ask.
TJ, Esq. and 5 other Real Estate Law Specialists are ready to help you