Legal Question in Tax Law in Florida

Re: Deed In Lieu of Foreclsoure

There are two income tax issues for this.

First, the cancellation of the mortgage debt may trigger taxable income up to the amount of debt. In this case the amount of potentially taxable income is the amount of debt minus the fair market value of the property. Fortunately, the Debt Relief Act 2007 prevents the cancellation of debt of on a primary residence from triggering cancellation of indebtedness income in 2007, 2008 and 2009.

Second, the IRS treats the foreclosure or the deed in lieu of foreclosure as a "sale". This may trigger taxable gain. The amount of the gain is the fair market value of the property minus the original purchase price (and cost of major improvements). Again, if you qualify, the revenue code excludes the first $250,000 ($500,000) of gain on the sale of your primary residence.