Contrary to popular belief, the deficiencies associated with both short sales and foreclosures are treated as debt foregiveness by the lenders and, more importantly, by the IRS. Debt forgiveness is essentially a form of income that may result in additional tax liability unless the borrowers are exempt under Mortgage Forgiveness Debt Relief Act of 2007. Click here for more information about debt foregiveness from IRS.
If youâ€™re a homeowner in distress, you should consult a trusted tax advisor in regards to potential debt forgiveness and short sale tax implications. Please do keep in mind that a short sale, in most cases, yields a significantly lower deficiency than a foreclosure.