Deed in Lieu of Foreclosure Ny Tax Consequences

Non-recourse debt is a loan that is secured exclusively by one or more assets and for which the borrower is not personally responsible. If the debt is considered a non-recourse debt, the transaction is also treated as an alleged sale, but the “proceeds” are equal to the balance of the outstanding debt (as opposed to the FMV of the property). Therefore, there is usually no payment-on-delivery income from a deed instead of a foreclosure transaction with a non-recourse debt. Instead, the debtor can realize a capital gain, which is measured by the difference between the balance of the outstanding debt and the adjusted basis of the property. Therefore, instead of foreclosure transactions that involve non-recourse debt, the deeds may provide a more favorable federal tax outcome because the transaction often results in a capital gains transaction rather than a cod transaction, which is taxed at normal tax rates. [NOTE: State land transfer taxes and municipal administration taxes are not levied if the seizure or deed is carried out instead of foreclosure under a plan in Chapter 11 of the Federal Bankruptcy Code. Given the way home loan transactions have been structured (e.B. with single-use borrowers, remote bankruptcy protection, bubble guarantees for bankruptcy filings), a borrower`s ability to be voluntarily or involuntarily bankrupt and to have made a seizure or deed instead of a seizure under a Chapter 11 plan is limited to specific circumstances and atypical.] Rather, one of the main advantages for borrowers of a deed is the lender`s ability to track the payment of a “gap”. The deficit is the difference between the value of the property at the time of transfer and the amount of the outstanding debt. The lender has the right to pursue a default in accordance with the recourse clause of the loan document. However, if an act is used in place of an act, the borrower is exempt from liability for defaults, either because (1) the laws of its state prohibit judgments of default after an act instead of foreclosure, or (2) the lender agrees under the settlement agreement to waive its right to default. If the state does not prohibit such lawsuits for inadequacy, a borrower will want to ensure that the lender waives its right to a gap in the settlement agreement. On the other hand, in most States, judgments of inadequacy can be obtained in enforcement measures.

As you can see, the tax consequences of foreclosure are complex. Marks Paneth remains available to give you more clarity on these unfortunate types of transactions and the tax nuances related to foreclosures and reductions in tax attributes. Let us continue the discussion. For the purposes of state land transfer tax and city transfer tax, a “transfer” includes a transfer under mortgage enforcement or deed instead of seizure (N.Y. Tax Act § 1401 (e); see N.Y.C. Admin. Code § 11-2102). With a deed instead, you simply return the property to the bank and move. In most cases, the lender will agree to forgive the balance of the loan if the property is worth less than what you owe. Short selling has many of the same advantages and disadvantages as an act in place: (1) the lender may be prevented from offsetting a default if (a) state law prohibits deficiencies in short selling or (b) the bank waives its right of default in the purchase agreement; (2) Deficiencies resulting from the short sale of principal residences may be exempt from tax under the Mortgage Forgiveness Debt Relief Act, 2007. (3) their negative impact on credit reports is less serious than the enforcement measures; and (4) lenders will generally not accept them if there are subordinated liens (this is because other lien holders must also accept the short sale, and since they would not receive payment of the proceeds of the sale, it is virtually impossible to obtain such agreements).

An alternative to foreclosure, which both the lender and borrower may consider, is to negotiate a settlement in which the borrower voluntarily transfers ownership of the property to the lender and the lender agrees to terminate the foreclosure. This is called an “act instead of foreclosure.” These types of transactions can have complex tax implications. A key element in determining how these transactions are taxed depends on whether the loan is a recourse or a non-recourse. He seemed fairly balanced about the situation and confident that he would be back on a solid financial footing. He just wanted to know if an act instead of foreclosure was a good option for him. What exactly is it?” he asked. What happens if I do? What are the alternatives? Another advantage of an act instead is that it does not harm your loan as much as a foreclosure. It`s easier than a short sale because you don`t have to bother finding a buyer for your home. EXAMPLE 2: A mortgagee enters into its second mortgage lien, which is entirely the responsibility of the borrower, and acquires ownership of the property upon foreclosure, subject to the first mortgage lien.

The judgment amount is $400,000, the first mortgage lien on the property after foreclosure is $650,000, the fair market value of the property is $800,000, and the mortgagee offers $200,000 at auction. The offer price ($200,000) plus the remaining privileges ($650,000) is equal to $850,000, and the judgment ($400,000) plus the remaining privileges ($650,000) is equal to $1,050,000. Since any debt is a remedy, consideration is limited to fair market value ($800,000). When a mortgage debt is in default, a mortgagee (lender) can assert its privilege by taking a foreclosure measure. In this procedure, when the property is sold by the arbitrator as part of the mortgage enforcement action, the property is transferred to the successful bidder (who may or may not be the lender) and the mortgage lien expires. In certain circumstances, the parties may mutually agree that the hypothecary debtor (borrower) will transfer the pledged assets to the hypothecary creditor by an act instead of foreclosure. Sometimes, instead of the mortgagee taking possession of the property, it is transferred to the mortgagee`s agent. In exchange for the deed instead of foreclosure, the mortgagee can waive the mortgage debt. In many cases, the lender will not cancel the ticket, but rather give the borrower the obligation not to continue and keep the mortgage alive and not to unload or release it until the property is subsequently resold. Logically, if a mortgagee (or candidate) acquires ownership of the property through a deed instead of a foreclosure and relieves the mortgage or agrees not to sue for the recovery of the mortgage debt, the mortgage ceases to secure a debt in good faith. For mortgage tax purposes, there are no longer any bona fide debts that need to be assigned, modified or otherwise settled.

Therefore, if a mortgage ceases to secure a debt in good faith, a subsequent instrument that purports to assign, modify or consolidate the mortgage cannot be treated as an additional hypothec under section 255 of the Tax Act and cannot be registered without the payment of mortgage registration taxes on the total amount of the secured debt. Owners can use a variety of methods to avoid foreclosure by the lender, including a deed instead of foreclosure (DIL). A DIL is the consent of a mortgage lender to accept an owner`s deed in exchange for the lender`s consent not to close. In addition, a lender who accepts a DIL from a homeowner also agrees to cancel the homeowner`s mortgage, but not necessarily a negative mortgage balance. Owners who use LADs to avoid foreclosure may sometimes also have a tax liability. The parties then negotiate the terms of the transfer and recall them in the settlement agreement. With the signing of the deed and agreement, the transaction is completed. From the borrower`s point of view, there are many advantages to using an act instead.

First, it exempts the borrower from his obligations to pay the loan documents. Second, compared to other options, such as foreclosure and short selling, an act process instead is quite quick and quite inexpensive. It does not require going to court and the borrower should not take the time, effort and costs to find a buyer for the property. One of the disadvantages of the deed is that it can have negative tax consequences for you if the lender cancels the balance of the loan. The IRS may consider the amount granted to be taxable income and you must pay income taxes on it. Contact a tax lawyer or accountant to determine if you are exempt. If a refinancing, loan change, or short sale is not possible for you, an act instead of foreclosure could help you avoid foreclosure. .