- When property values drop and a homeowner finds himself upside down in his loan, meaning he owes more than what the property is currently worth, it is virtually impossible to sell the property for enough to pay off the house's debts. If the homeowner needs to move from the area or is no longer able to make his house payments, a short sale is one way a homeowner can unburden himself of the property.
- The lender must give the borrow permission to list the short sale. Lenders normally require the borrower to prove the property value has dropped below the current loan balance through an appraisal, broker's price opinion or comparative market analysis. When the homeowner accepts an offer from a buyer, the lender then approves, rejects or counters the offer.
- A lender who agrees to a short sale may issue a deficiency judgment against the borrower after the short sale to hold the former homeowner liable for the unpaid balance of the loan. The lender also might agree to forgive the unpaid balance and not hold the seller liable. But even if the lender forgives the unpaid balance, the seller may face some tax liability.
- When a lender forgives a borrower's loan, the Internal Revenue Service views the forgiven amount as income subject to income tax. The Mortgage Debt Relief Act of 2007 has put into place exemptions to shield some short sale sellers from tax liability.
- Before listing a property in a short sale, consult with an accountant and attorney to determine if a short sale is your best option and if there will be a tax liability. The tax exemption under the Mortgage Debt Relief Act of 2007 applies to qualified sellers with forgiven debts occurring from 2007 through 2012. The house must be the taxpayer's primary residence to quality. Debts discharged for reasons other than a decline in property value or the taxpayer's change of financial situation may not apply. The maximum amount of forgiven debt allowed is $2 million, or $1 million if married and filing separately.
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