Deed in lieu of foreclosure on a rental real estate investment property is the process in which you offer the deed for your property back to the lender in exchange of getting the rest of the mortgage debt forgiven. This will save you from losing your home through foreclosure whereby the bank takes possession of the property and tries to sell it to recover the loss. Deed in lieu of foreclosure forgives the understanding debt. This eliminates your debt; it increases what you owe to the Internal Revenue Service. Please remember that Internal Revenue Service treats the forgiven debt as an income and so when the forgiven debt amount is large, it can put you in a higher tax bracket. However, forgiven debt on a residential property is not tread as an income by Internal Revenue Service. But if the property is rental or secondary home, the forgiven debt counts towards income.
At the beginning of the following year after surrender of the deed, the lender will send out tax documentation for any forgiven debts. The document will list the amount forgiven as well as your name and address. The bank sends this document to the Internal Revenue Service which information must be included in the income section when filing taxes. Also when the rental property is taken away through deed in lieu of foreclosure, you miss out on some of the tax deductions.