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Below you will find an excerpt from the irs.gov website concerning taxes on deficiencies to the lender as a result of a short sale.

The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief. This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition. More information, including detailed examples can be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. Also see IRS news release IR-2008-17. ————————- This article will attempt to address the following: 1. Define a short sale 2. Talk about the different ways it can come about and be structured 3. Talk about how it’s different that foreclosure or bankruptcy 4. Talk about the implications for the seller 5. Talk about the implications for the buyer 6. Address investor related questions on capitalizing on short sales (which you will soon find based on the definition is not really what you investors are looking for).

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