If a lender takes a deed in lieu of foreclosure what income tax is owed?

Author: Rob K. Blake | Date: April 14, 2008 | Filed In: Foreclosure Answers

Here’s the entire question:

“If the lender takes a deed in lieu of foreclosure on a piece of property, does the lender have to pay any additional taxes other than whatever proceeds were received during the borrowers payment history. i.e. My borrower has made interest payments for 1 year, now they want out. I realize I have to pay take on the interest payments received, but the gain I stood to make was never realized - do I the lender still have to pay as if gain was realized?

Deed in Lieu of Foreclosure Tax

I’ll answer that question with a question:

How could the IRS make you (the lender) pay income tax on income that was never realized?”

I’m no tax expert, but it seems to me the taxes are calculated on “net income” and since there is no net income…income after expenses in your scenario there would be no tax.

So, my answer is you are are right…

The IRS would not expect a any tax on a net loss. As a matter of fact, I’d expect the lender in your scenario would most likely have a significant write-off.

Once again, I’m no tax expert, so this is not tax advice nor should you rely on the answer.

Seek a professional advice in all legal and tax matters.

Thanks for the question.

Good Luck!

Author: Rob K. Blake