Can You Do a Deed in Lieu of Foreclosure If You're Behind on Your Taxes?

Lender Qualifications

Lender qualifications for a deed in lieu of foreclosure focus mostly on the legal obligations connected to the property. For liens and property debts, the claims usually follow the property itself. If the lender agrees to take the property, the lender also becomes responsible for any debts associated with house. For this reason, if there's a second mortgage or a tax lien on the property itself, the lender won't accept a deed in lieu, so unpaid taxes can be a serious problem.

Type of Taxes

Homeowners should note that not all unpaid taxes end up in a lien against the property itself. The government generally only starts with a property lien in the case of unpaid property taxes, not unpaid income taxes or other tax categories. Fortunately for homeowners, lenders usually pay the property taxes themselves so that government property liens don't occur.

Solutions

If a property tax lien created by the government, because of unpaid property taxes, is recorded, then the lender won't accept the deed in lieu at all. However, if homeowners can pay off the property tax debt and have the lien removed, a deed in lieu again becomes a possibility. Because property tax debt is generally low compared to other types of debt that homeowners have to deal with, this may be a possible solution if homeowners have enough time. The property tax debt probably has to be paid off no matter what if homeowners seek an option besides foreclosure.

Future Tax Obligation

The tax debt due on a property shouldn't be confused with the future tax obligation that a deed in lieu can create. In certain cases, such as a short sale, the lender sees that the house's value doesn't cover the original loan amount fully, so the lender simply forgives this leftover debt amount. Forgiven debt counts as income and creates an extra tax obligation that homeowners must pay even after the deed in lieu.