Short sale tax forgiveness has expired.
If your house is “under water” you need to read this.
The general rule of tax law is that debt forgiveness is income—if I lend you $1,000 and then say you don’t have to pay me back, you’ve made $1,000. And you’re subject to tax on that.
That matters in a big way when there’s a short sale. You could be taxed for the amount the sale is “short.” That tax was repealed for the duration of the housing crisis.—2007-2016. But that repeal is now expired.
So if you need to unload a property that’s “under water,” from a tax viewpoint bankruptcy is lots better. (There’s no debt forgiveness tax on debts wiped out by law in a bankruptcy.)
If you owe $340,000 on your house and get approved for a short sale at $300,000, you’ll get a $40,000 1099-c at the end of the year. And owe something like $15,000 in taxes.
If you file bankruptcy and give up the house in the bankruptcy, no tax.

Starting in 2017, you can get hit with the debt forgiveness tax on a short sale. You’ll get a 1099-C on the amount the short sale is “short.” And the IRS will expect you to pay taxes on that.
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