There are two interrelated issues. The Mortgage Forgiveness Debt Relief Act which was extended through this year allows taxpayers to exclude income from the discharge of debt on a principal residence. So even if the bank issues you a 1099 there would be no federal income tax due if you close the transaction by the end of the year.
Banks like money and they will do what they can to get funds out of you now, or at some point in the future. Agreeing to a short sale does not take the right of ten lender to go after you for the difference between what you owe and what the short sale net proceeds. That is why it is critical you are working through a qualified firm when negotiating a short sale as you want a waiver of their ability to go after you in the future for that amount.
Hope this helps....
Tom Priester e-PRO
"Results Driven Real Estate"
Keller Williams Realty
We have been successful in getting homeowners off the hook for the deficiency, as well as, getting homeowners up to $23,000 in relocation assistance. Every file is different. You may qualify for HAFA, and be relieved of the deficiency. Even if you don't qualify for HAFA, it is possible your bank may waive the deficiency, or part of it. Feel free to give us a call to see if you qualify. Please call with any questions.
Short Sale Department, LLC