I just listed a home in Simi Valley yesterday that had this exact same situation and it just is a big fat can of worms you really do not want to get into. Richard in Riverside is stating what is becoming the norm.
You have received great information so far but I have a few more things to add.
In a short sale you will want to determine if you are or are not getting fully released from the deficiency balance. The is the amount that is the difference between what you owe on the home and the amount the lender recieves when they agree in writing to short sale the home. Sometimes they will ask you for a small note for part of the deficiency amount and if you agree, you may believe that this is all that you will be asked to pay, if you do not agree and they proceed with the short sale, you may think that it is over but unless your short sale agreement contains specific conditions to release you from the deficiency balance, you could be on the hook and the lender or the people the lender sells your deficiency balance to, a collector, will be asking you to pay...after you have lost your home and your good credit and at the point, you may need to consult an attorney about bankruptcy. If you have other assets, it may make sense for you to agree to a small unsecured note as part of the terms but you will want to make sure that this covers you completely for the deficiency.
To add to the confusion, their may be some reilef. There is talk of the government requiring the lenders to provide forgiveness for the deficiency debt and then for the government to provide forgiveness for the tax that you would pay on the forgiven debt, which would typically be seen as income. But at this time, these items have not come into law. So, timing your short sale may turn out to be important.
It is very important that you use a Realtor for your short pay who understands a great deal about the short sale process. Then, you will be wise to use an attorney to review your written short sale agreement so that you fully understand the issues included and not included in the terms. If you have not already selected a well qualified Realtor to represent you, please consider contacting me through my Trulia profile.
We now have 3 licensed CDPE Certified agents on our real estate team, along with an in-house enrolled agent (tax specialist) and access to an attorney through our short sale negotiations company. To learn more about CDPE, the short sale process, and a plethora of information on this subject, please visit our website, where you can find foreclosure help online. We hope you are able to resolve your dilemna in a timely fashion and can move on with your life.
I would be very careful to ask an attorney and tax professional for advice, since it appears you have refinanced your home to pull out equity. Purchase money is non-recourse in California. You will receive a 1099-C (Cancellation of Debt) from your 1st and other lien holders. The IRS will require you to pay taxes on that :income" -- unless you can offset it with an insolvency declaration. I have someone I work with that can advise you along those lines. There is no real "advantage" to your daughter and her finace to buyng your specific home -- they can buy whatever they qualify for. It would be lender fraud if you mis-represented the sale and did not disclose the relationship to the lenders. Please do the research and look into a loan modification as well. Good luck in your decision.