Well I cannot tell you whether you should do a short sale or not that is something you will have to decide on. But I can tell you that this is your LAST CHANCE if you are worried on paying for taxes whether you do a short sale or not. The Mortgage Debt Foregivness act was extended to the end of this year. Basically what that means is that if you think or have been wondering if you want to do a short sale or if a short sale is something that might be in your benefit. The reality is you do not have much more time to be giving it any thought. A typical short sale takes appox. 6 mos close from start to finish, and sometimes longer. We have a short sale in our office now for over a year, literally over a year still trying to get the approval from bank to do the short sale, actually its the second giving us a headache on it.
But in order for the debt to not be counted as taxable income the short sale must close by the end of this year. Meaning the home has a new owner before 12/31/2013 other wise the yes it will become a taxable event. For example you owe $400,000.00 on your home its only worth $250,000.00. The difference would be a $150,000.00 tax bill to you. Under normal circumstances when debt is forgiven or charged off as far as the IRS is concerned you reaped the benefits of that loan. So as far as they are concerned you have received some form of income from this loan. This is what they call phantom income, but not if you do a short sale and close before the end of this year. Now this had to have been your prinpal r
After this year you may still be able to avoid the tax consequences via bankruptcy or other alternatives such as showing you are insolvent. But that will be something that you will have to get with your tax preparer or possibly attorney. Just remember even if you find yourself having to file for bankruptcy its not free and can cost a few thousand.
A short sale for many may be ideal if they can get past the emotional attachment to the home. The problem is that if the home is a financial burden and you are doing everything you can to save the house. You may only be prolonging the inevitable and by that time doing a short sale may not be as beneficial. But the Clock Is Ticking!
Just a few last things, 1) you should not have to pay the agent you use to do the short sale for you, their compensation will come from your lender. 2) You can live in the house even while the short sale is in progress and even if you are not making any payments. 3) Your lender can, and may even offer you a loan modification on your home even if they have denied you before and you can cancel your short sale. 4) Do not move out till you have to but do plan on moving if you move out to early you may be denied relocation assistance which can be as much as $5,000.00, so stay put but be advised this does not mean you will get any funds. But if you move out you will forfeit that option.