A short sale is an arrangement between the current owner of a home and the current mortgage lender to accept an offer for less than the total amount owed on the home loan which also includes other obligations such as closing costs, property taxes, transfer tax, and/or commission.
In some cases, sellers may be in default on their mortgage and are potentially facing foreclosure. Many sellers find themselves in an upside down situation, meaning that they owe more than they can potentially realize from the sale of their property.
Simply said, a short sale is when the lender lets you sell your house for less than what you owe on the mortgage. Then at tax time, you had to pay federal income tax on the forgiven debt.
In 2007, Congress passed an act that the IRS would stop tax collection on forgiven debt until 2013. Now, just 6 months away from the 2012 deadline, it is still unknown if Congress will renew that no-taxes-on-forgiven-debt rule. It’s just one of literally trillions of dollars of tax benefits expiring at the end of this year. We also cannot forget that our individual states have their own tax laws on debt forgiveness.
Be advised that a short sale (which is anything but) usually takes a long time to complete. If you are considering a short sale or are in the process of one, do what you can to help the process along. 2013 will be here before you know it, and again, since the future of this debt relief is unsure, try to have your short sale close before the end of the year, or hope that the no-taxes-on-forgiven-debt rule is renewed in 2013.