It’s always a wise idea to discuss the Tax implication of your Short Sale with your CPA or Tax Planner.
However, home owners are generally protected against a deficiency judgment after a Short Sale. The Mortgage Forgiveness Debt Relief Act of 2007 provides an exception from Federal taxation if the Short Sale of your home meets the following conditions:
1) property must be a qualified principal residence as defined, by IRS Rules which typically means you must have lived there for the past 2 years.
2) loan is secured by the residence. This means that loan will show up on the Property Profile with the lender as the beneficiary.
3) Your income is capped at $1,000,000 for married couples filing separately and $2,000,000 for all others income categories.
4) loan is discharged after January 1, 2007 and before January 1, 2013.
But the State income taxes for the forgiven debt might be different in the State where you are located. In fact, since most State are suffering from budget short falls, some have been reluctant to create legislation to protect the troubled home owners and require taxes to be paid on the difference between the Short Sale transaction and the loan amount.
Bottom line is that you are well advised to Dept of Housing and Urban Development to discuss the tax implication of your Short Sale in the State where your property is located.
And Contact Us if you have any question on your Short Sale.