What is the tax liability on a Primary Residence that was turned over as Deed in Lieu?

Question

2010: Home was purchased in New Mexico, USA.  Negligible down payment.  PMI included.  Price $152k

2019: Attempted short sale due to hardship (moving to a new city after losing job).  Short sale failed with total lack of interest in the property, even at a price point of 66% of original cost.  Mortgage company agreed to Deed-in-Lieu, with no further liability.

Is there a tax liability on any portion of the forgiven debt?

For additional details, the Mortgage Debt Relief Act of 2007 appears to exclude as income any debt discharged up to $2 million, applied only to your principal residence.  The initial timeframe covered was between 2007 and 2010, but has been extended a 6th (and final?) time to 2019.

xyious · Answer

You would think that the property you're giving them is worth about as much as the debt they're forgiving.... Which essentially means you're selling your house for the amount of the current mortgage.

If that amount is far higher than what you paid for the property (and exceeds $500,000 in gains if it's your primary residence) then you will have to pay capital gains tax on the appreciation.

What is the tax liability on a Primary Residence that was turned over as Deed in Lieu?

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