Teri,

I deal with this question every day.

You need three professionals: a tax accountant, a lawyer and a good realtor who is familiar on a day-to-day basis with short sales..

How the lender signs off the short sale payoff at the close of escrow will determine whether you even have a deficiency or not. This is where the negotiator of the short sale must be an expert.

If you are issued a 1099-C in January, then the deficiency has been reported to the IRA as income. If you do not receive a 1099, then it is possible that the deficiency has been "kept alive" and the bank may attempt to collect.

It's an either/or scenario. You either have a collectable deficency OR a tax liability - assuming you didn't agree to pay off the deficiency over time as an unsecured note.

I would alway defer to Mr. Krismer...he is a wise man with a solid understanding of many issues such as these. You'd do well to contact him for further information.

Sellers need to make sure they are working with an agent that is looking out for their best interest. Frankly, depending on the deal your bank is willing to give you and where you are at financially it might be best to let it go into foreclosure. If your credit is already beyond repair and the bank is not willing to work with you, .i.e. not go after you for deficiency and not report it as income to the IRS. My opinion is to speak with a lawyer about this.

I wrote a blog piece on the deficiency issue, which also touched on the tax issue a tiny bit:

http://blog.seattlepi.com/realestate/archives/169061.asp

The bottom line is you really need an attorney to represent you as to both issues (or tax accountant on the latter issue).

Teri

It is up to bank whether they try to collect the deficient amounts. Most of the lenders are reporting
the deficiencies to the IRS as taxable income to you. You can certainly ask the lender this question
and they should be able to tell you their policies. On your personal residence if you wish to stay
there and are employed you can ask about doing the HAMP (home affordability Mortgage Program)
which may lengthen the amoritization period, reduce the interest rate or another solution to help
you stay in the home if that is what you would like to do. If the deficient amounts will pose a similar
problem by being added to your income you can ask your lender what other options are available
to you and they should be able to direct you to the appropiate department or agency. You might
also want to consult with an attorney, accountant or financial advisor.
Mary