What about a deed in lieu of foreclosure instead of an Arizona foreclosure?
If given the choice between 'foreclosure' and a 'deed in lieu of foreclosure,' your lender wants you to do a deed in lieu of foreclosure every time. It makes things easier, cheaper and gives them a much better chance of getting a house back in good shape. IMPORTANT: In exchange for doing a deed in lieu of foreclosure you want get an ESTOPPEL from your lender. That means they will not come after you for the balance due after your deed in lieu of foreclosure. The most important part of this blog post: remember estoppel. This is the ONLY reason why you should do an Arizona deed in lieu of foreclosure.
When you complete a deed in lieu of foreclosure you may or may not get a Form 1099-C. The Form 1099-C reports debt forgiveness. That means that you owed more than the property was worth and the lender is writing off the difference. In other words, they loaned you $250,000 to buy the property and it’s now worth $150,000. So they took a loss of $100,000 after the deed in lieu of foreclosure.
Don’t be misled by what your lender’s customer service rep tells you about deed in lieu of foreclosure. Your lender has 4 years after the deed in lieu of foreclosure to come back after you for that debt (in most states) and will probably do it as soon as they think you are back on your feet.
Get an estoppel if you do an Arizona deed in lieu of foreclosure. That means they have forgiven the debt after your deed in lieu of foreclosure.
Important: You have a way out of the tax in the year that you complete the deed in lieu of foreclosure and the debt is forgiven. To explain further, if you have a “principal residence debt forgiveness,” are “bankrupt,” or are “insolvent” in the year of the forgiveness -- you do not have to pay tax on the forgiveness. But you only eligible to take that exemption after your deed in lieu of foreclosure if you file Form 982.
If you are going to do a deed in lieu of foreclosure remember two things: Estoppel and Form 982. Those are the secrets to putting this bad real estate market behind you and achieving some measure of peace.
DISCLAIMER: I learned some of this information by reading experienced Real Estate CPA, Diane Kennedy and from professional acquaintances. I am a Metro Phoenix, Arizona realtor and recommend you consult an attorney and CPA for how a deed in lieu of foreclosure affects you.
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