Is there a Possibility Tax Consequences..... YES it could be.....

There MAY be a TAX Liability created by either a FORECLOSURE or a SHORT SALE. You as the Home Owner should talk to your tax divisor as I'm a  Realtors and NOT tax adviser and not allowed to give tax advice. The Seller receives a 1099 for the DISCOUNTED amount. The IRS looks at the discounted amount as Income. Home Owner will receive a 1099 from the lender.

You can file FORM 892 if you are Insolvent and can prove it. Meaning they do not have the ability to pay it.

 Scenario:

If your income is $30,000  for the year and the discount is $45,000. You may owe taxes on $75,000 for that year. Now if you are insolvent and can prove it, you can file the 892 along with 1099 and you may not have to pay that tax for that year. ( again I'm not tax adviser.. You will need to  talk to your tax adviser for details and final decisions.

The benefit to the seller  for doing a short sale is they do not have Deficiantcy justment for the foreclosure

1. Home Owner DOES NOT have a foreclosure on their credit report
2. Home Owner WON'T have a deficiency judgment that would be there if it goes to foreclosure
3. Home Owner AVOIDS the Humiliation of a being put out and home sold on the court house steps.
4. Home Owner COMPLETES their original commitment with Integrity
5. Home Owner gets to put up a REAL FOR SALE SIGN instead of having the Sheriff come put them on the street.
6. SMALLER Tax Liability