Definition
In this scenario, a borrower in financial trouble transfers the property to the lender to avoid foreclosure. It's an alternative to foreclosure but has serious tax consequences.
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A deed in lieu of foreclosure (often abbreviated 'deed in lieu') allows a borrower who cannot pay to transfer the property directly to the lender, avoiding the expense and damage of foreclosure. The lender gets the property title without foreclosure proceedings. This option may spare the borrower from a deficiency judgment but has serious tax and credit consequences. Some lenders prefer deeds in lieu because they're faster and cheaper than foreclosure.
Pro Tip
Deed in lieu has serious tax consequences. Consult a tax professional before considering.
Example
Unable to maintain payments, the borrower offered a deed in lieu to avoid foreclosure.