What is a short sale?
A short sale is the process in which the current lien holder(s) agree to reduce their payoff in efforts to sell the home on the current market. A short sale generally occurs when (1) the homeowner's mortgage exceeds the value of the home hindering the ability to sell and (2) when the homeowners have encountered a hardship making it difficult to fulfill their monthly payments.
Examples of Hardships:
The most common and perhaps the most acceptable hardship is reduction in income or loss of employment. Whenever a homeowner's income is affected the lenders are most sympathetic and more willing to help. Other hardships can include death in the family, medical complications, and other situations which may affect the agreement. Anybody can say that their income has been altered or that they've had medical issues, etc..., but the number one rule is "can you prove it?" Proof in the form of documentation must be provided every time you're trying to prove a point to the assigned negotiator of your case.
Are there any tax consequences when short selling?
Yes and no. Usually, the amount that the lien holder is "eating" will be added on to your total annual income and taxed at the appropriate income tax bracket. For example, if a home seller owes $200,000 and the bank agrees to sell the home for $100,000. The $100,000 difference will be added to the homeowner's income of let's say $50,000 and taxed at an income tax bracket of 28%.
I also say no because the Obama Administration have passed a Mortgage Forgiveness Debt Relief Act in 2007 that now extends out to 2012 and as the name states, any indebtness that the bank accrues will be forgiven. There are some stipulations to this relief act; the most important is that the home must have been the homeowner's primary residence. The other regulations can be found on the official IRS website or by clicking on http://www.irs.gov/individuals/article/0,,id=179414,00.html.
How does a short sale affect my credit compared to a foreclosure?
The damage that a foreclosure has on a homeowner's credit file is far more detrimental than a short sale. A short sale usually reports as "settled" and a foreclosure reports as... you guessed it, a "foreclosure". The damage of a foreclosure equals to approximately 200 points where as a short sale affects the credit report by about 60-120 points. The rebound time of a foreclosure can be anywhere between 2-3 years where as the rebound of a short sale takes about 6 months to 1.3 years.
If you're like the thousands of homeowners which homes are underwater and have tried modifying their loan to only find that the modification didn't even come close to helping then a short sale can be the biggest weight lifter you've ever had. Yes there is an emotional attachment to the home, but when the home becomes a burden instead of an investment the emotions turn sour. You must "gut check" yourself to find out if getting into a home that you can afford and enjoy would be a better route to take; even if the process entails you having to rent for a couple of years.
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