Deed in Lieu is a Bigger Problem than Foreclosure

Did you know that deeding your property back to the Lender instead of allowing foreclosure can cost you! Under Federal Law, Lenders who accept less than the full remaining balance on the loan (including late fees, interest and other chargable items) must file a 1099-C (as opposed to the 1099-S.) The 1099-C shows any concessions made by the Lender, and tells the IRS the concessions are TAXABLE INCOME.

For example, say your Mother took out an exotic loan to help pay medical bills and refinance the house. The loan is an adjustable rate for $312.250. -(125% of the then current value of $250.000.) The loan was at 5% interest two years ago and is now at 9%. She was assured that housing markets would continue to rise.

Now she finds herself unable to make the payments, and the current house value is estimated at $242,000. If the Lender is willing to accept $242,000. for a deed in lieu of foreclosure, knowing that is the best they can do, it must file a 1099-C with the IRS. The IRS will then show that Mother has received TAXABLE INCOME in the amount of $70,250. OUCH! As unfair as it seems, she now has another problem, one bigger than just losing her home.