However, the lender in this case has to write off the entire loan. Therefore the lender could potentially be reported as income and the owners could be subject to Federal and State taxes which could be substantial.
Also, unlike the Short Sale where the loan could be reported as “paid in full/satisfied”, Deed in Lieu could have negative impact on the owners credit history.
In contrast however, Short Sale affords the owners an opportunity to sell the property for less money that they owe to the banks without being subject to Federal income taxes. Most States also don’t require income tax payments on the forgiven debt, but we advise our clients to contact their CAP or Tax professional to be certain of their tax liability.
We advise our home owner contact Department of Housing and Urban Development (HUD) for help with ALL their options. HUD will assign a counselor to help homeowners reach out to their lender to explore ALL of their options.