What are my tax obligations if I let my house go into foreclosure or do a deed in lieu of? 2 Answers as of January 21, 2011

What are my tax obligations if I let my house go into foreclosure or do a deed in lieu of? My house has been assessed at $150,000 and I owe $359,000 and my mortgage company will not work out a modification for me.

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Steven J. Fromm
Steven J. Fromm | Steven J. Fromm & Associates, P.C.
The discharge of a mortgage when the taxpayer disposes of their property, including by foreclosure or repossession, will generally result in cancellation of debt income to the extent the mortgage discharge exceeds the fair market value of the property. However, a taxpayer may exclude from gross income up to $2 million (1 million for married taxpayers filing separately) of any income from discharge of qualified personal residence indebtedness. (Note: The taxpayer must reduce their basis in the home by the amount excluded.) So you will not have taxable income if you meet the above rules.
Answer Applies to: Pennsylvania
Replied: 1/21/2011
LT Pepper Law
LT Pepper Law | Luke T. Pepper
The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. This act is active from 2007 to 2012. I assume you have non recourse debt as defined by the IRS. A non recourse debt is a loan where the lender's only recourse is to repossess the house. The lender should provide a 1099 C which will show how much debt was remaining. There is a formula that your tax professional will be familiar with.
Answer Applies to: Pennsylvania
Replied: 1/19/2011
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