A short sale is a real estate transaction that occurs where the mortgage debt exceeds the net sale price (minus commissions and other costs).
A few things to look out for when considering a short sale:
– Usually lenders will not grant relief to any short sellers. Thus, if the real estate transaction goes through but the seller still owes money to the lender, the lender may still seek out the seller for the money owed.
– If the lender does forgive the outstanding debt from the seller, the forgiven amount constitutes cancellation of debt (COD) income. It still must be reported on your tax form as income. However, there are exceptions to reporting it as income which include: bankruptcy, insolvency and whether it is your principal residence (up to $2 million).
-Nonrecourse mortgage debt is a type of mortgage in which the lender cannot seek an additional deficiency judgment from the seller. In these circumstances, the mortgage is secured only by the real property.
In this type of transaction the short sale would satisfy the nonrecourse mortgage debt obligation. Thus, there can only be gain or loss without any COD issues.
More information on short sales and deficiency judgments in Washington state can be found here.