Tax implications in a short sale
The Economic Stabilization Act extends the Mortgage Forgiveness Debt Relief Act to 2012, but it was extended during the fiscal cliff negotiation until December 31, 2013.
Up to $2 million forgiven debt of a taxpayer’s principal residence is exempt from taxation due to this Act. It also includes refinancing to the extent of the original debt (not any cash that was taken in the refinance).
For tax years 07 - 13, the government is waiving any tax liability on this forgiven debt. The lender will send you and the IRS a 1099-C "Cancellation of Debt" if the investore / bank decides you are not collectible - and they write the debt off.
You or your accountant then files a Form 982, which can be downloaded from www.IRS.gov
Be aware, that forgiven debt on vacation homes, investment and rental properties may be taxable, unless you can prove insolvency.
Give this information to your accountant when completing your tax returns.
This section is not intended to give tax advice. It is advisable to confirm the current tax laws with each case with your tax advisor.