In this sad time of many people losing jobs and homes and many foreclosures in the market, people are feeling desperate. I've worked a few short sales in the last few months and it is heart breaking. Families that have already struggled for months trying to balance it all and finally giving up and letting it all go. Unfortunately, they don't fully understand the idea of the "short sale". For all the consumers out there looking for a way out from under the house payments and trying to find out information on "short-sales", please remember that you're not off the hook. Just because you're late and the bank has decided to allow you to find a realtor and try to sell your house as a short sale it doesn't mean you and the house have parted ways for good.
A short sale is a forced sale of a property where the owner is one or more payments behind on the mortgage loan and the bank has agreed to try and sell for whatever they can. Usually the bank will try to get as much as possible hopping to collect enough to cover the loan obligations. However, if the borrower has more than one loan, or they borrowed a lot more than the house is worth at the time, it is not possible to collect much. The consumer thinks that "that is no skin off his back" and it is the bank's loss. Yes and No. It is the bank's loss at the time, however, when tax time comes, you, the consumer will be charged a tax on that loss the bank suffered. If your house sold for $10,000 less than what you owed the bank, the bank will send you a 1099 MISC at the end of the year showing that you had an additional $10,000 income that you will have to pay taxes on. (the forgiven debt, it's not really forgiven)
What can you do? Don't quit taking care of the house if you can. Keep cutting the lawn, keep the house clean, try to fix any minor problems if you can to help the house sell faster and for the most amount of money. The more it sells for, the less money you'll owe on taxes at the end of the year. So, please remember, it's not over, till it's over.
Boy... this is so sad but true! Even when the short sale is over; you are right the tax liability is not. Good post many sellers do not know this. Thanks for sharing. Brenda 
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