This is my story on my short sale experience.  I am NOT a CPA, attorney, financial advisor, or tax advisor.  Nothing I say should be considered direction in anyway, it is for informational purposes.  Make sure to check with a short sale specialist and an attorney prior to making any decision on your own.

If you are reading this you may already know that I am currently in the process of short selling my home.  The first question people ask me regarding this is what is the difference in doing a short sale vs foreclosure?  The simple answer is there really is no difference, in both you default on your loan, in both you lose your house, in both you have the hit on your credit.  The complicated answer is everything.  For a short sale in real estate the definition is that the bank accepts less than you owe for the property and they take a loss. 

The short sale process is neither a short nor an easy one.  It is not a magic pill to get you out of the situation, it is not a get out of jail free card, it is very damaging to your credit score equivalent to a foreclosure, but if you are like me and so far upside down that making the payments will put you into foreclosure short selling is a definite option.

The first thing we looked at when making our decision was simple, the financial ramifications.  When looking at financial decisions one of the first groups we look at is the IRS and the tax ramifications.  Anytime you look at getting out of your mortgage through a short sale you know your credit will be damaged (you have to be 90 days behind before a bank will even consider a short sale).  The IRS you will always owe, and they do not go away.  So tax ramifications were the first thing we asked our attorney about.

He directed us to the information on The Mortgage Forgiveness Debt Relief Act of 2007, signed into legislature by Bush when he was still President.  While I am not an attorney I will tell you what I found reading it in the simplest terms I can come up with.  Our Attorney has said that I understand correctly, but again, I MUST make it clear if you plan to do something please check with specialists in your area every state is different and every case is different.  For us, the law benefits us in the following way:

In our case we owe $165k on our house.  For simple math let's say our home sells for $100k.  (You MUST list your home with a licensed real estate agent in order to accomplish a short sale; the bank will not allow you to sell it yourself.)  Anyway, that is another hub.  Back to subject.  Previous to this legislature the bank would accept $100k for the home, and then 1099 us for the $65k difference.  This would mean in layman's terms we would be responsible for $65k as income.  For us that would mean that we owed the government as if we had made an extra $65 when we sold our home.

The Mortgage Forgiveness Debt Relief Act of 2007 alters that equation.  It does have a few catches but they are reasonable in my opinion.  Let me explain.  The primary point that you have to keep in mind is to qualify for this forgiveness; the property in question has to be your primary residence.  IF it is your primary residence, which in FL is easy to prove we have homestead here.  So if you can verify it is your primary residence you qualify for the forgiveness. 

What does this forgiveness mean?  Exactly that, if the bank agrees to the short sale, they have to forgive the difference.  You are not 1099'd for the difference.  This means you do not owe taxes on the difference.  This is a HUGE point and part of what caused the scales to tip in favor of going forward on the shortsale.  There are limits; I think it is $1,000,000 for a single person and $2,000,000 for couples I believe.  Either way I know personally we fall WAY below that!

So financially we know that we will suffer ramifications from the short sale process on my credit.  But having a subprime loan we are prime candidates for the short sale.  The banks are working with persons like us more now simply due to the avalanche of foreclosures that are coming through.  Having an attorney is vital to your success in this matter though.  Please, please, please use a professional, in most cases they are paid by the bank, and the cost to you is nothing.  If you see foreclosure on the horizon don't you owe it to yourself and your family to at least talk to someone about alternate possibilities?