I called the IRS today and had a lengthy conversation about the consequesnces on short sales with them. Bottom line is Nobody has to pay anything! Great news. Everyone is afraid of the capital gains and there is no need. Short sale tax consequences are nothing.
You will need to get a advice from a cpa or call the IRS. The IRS wants you to call because each sale is different, which I understand, nobody sale is the same.
Here is what IRS states:
Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for this relief. In most cases, eligible homeowners only need to fill out a few lines on Form 982 (specifically, lines 1e, 2 and 10b).
The debt must have been used to buy, build or substantially improve the taxpayer’s principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing.
Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the new tax-relief provision. In some cases, however, other kinds of tax relief, based on insolvency, for example, may be available. See Form 982 for details.
Borrowers whose debt is reduced or eliminated receive a year-end statement (Form 1099-C) from their lender. For debt cancelled in 2007, the lender was required to provide this form to the borrower by Jan. 31, 2008. By law, this form must show the amount of debt forgiven and the fair market value of any property given up through foreclosure.
If you have done a short sale, talk to your accountant about form 982. IRS said it is for personal homes the rule is that you have to have a gain on sale of home:if individual $250,000 or married $500,000. So you will have to made over $250,000 to pay any taxes on the short sales shortage. They told me that if it is a nonprimary home that you need to drop the basis on anther home and pay taxes later. Please call IRS for specifics on your deal.
Short sales are better for seller and banks. Make sure you get all the information before you dive in. You can call me anytime 352-266-2637 i would love to help you.