Worst case is you are hit for taxes on the loss or perhaps a judgement from the lender. Best case, you walk away scott-free besides the obvious damage to your credit.
Things like these really do depend on a lot of the finer details of your situation, so do yourself a favor and speak to a pro. Mostly just realtors and mortgage folks on this site.
Sorry about your circumstances. Best of luck
I always recommend that you may want to speak with a tax attorney or a CPA regarding the tax implications. In general though, you will most likely be taxed on the deficiency amount between the sale price and your loan balance. So if your lender will be taking a $100,000 loss, then you would be taxed on $100,000. This would apply if you were to short sale or foreclose too. Of course a short sale is a huge benefit to most people. It also sounds like you would have a good chance of getting your short sale approved because of the previous foreclosure you had. The lender will see that you truly did have some financial issues and should be worried that you will allow this property to foreclose on as well. They don't want your home back, believe me.
I specialize in short sales and would be happy to see if I can help you in your situation. Please call me to discuss your situation more in depth and I will be happy to let you know about my success with short sales. My contact info is below. Hope to hear from you...
Short Sale Specialist
Prudential Americana Group
Direct: (702) 203-6688
Im actually working with client on short sale currently that had their investment property get foreclosed on last year and are in the process of a short sale currently. Short sales in general have less negative impact on your credit than a foreclosure or bankruptcy, which helps you get back into the position of owning your own home again much sooner. Also, if a bankruptcy is needed later on down the line, having a mortgage off the table is very helpful in getting your bankruptcy finished.
I am not a tax accountant, and you really should speak with someone that specializes in tax and accounting to be safe, but here is how I've explained the tax part of short sales to my clients.
For a long time Uncle Sam didn't give any "free rides" when it comes to tax on transfers of title. With our recent melt down, and the inordinate number of short sales and foreclosures, Sammy's lightend up a bit, at least for primary residences under 2 million. Once you and your current home part ways from your successful short sale, where your lender gives you a complete release of lien (its important that you negotiate for that, so you don't have a non-secured note with the lending institution that would require bankruptcy or payment to discharge) you should receive a 1099 C debt relief form from your lender, that will show the amount of debt relief you received (basically what the bank wrote off) . The amount that was forgiven, will have to be filled into another IRS form, 982,(they really love their forms...I think thats why trees hate the IRS more than anyone). You will have to attach the 982 form to your return and send the whole shooting match in to the IRS. Even if you haven't used a tax professional in the past, its probably a good idea to do so this year. That way you don't miss anything that could come back to bite you later.
I would suggest your read the actual explanation from the IRS by following this link
the actual form 982 can be found by following this link
It has instructions with it as well.
When you do a short sale, you will have to put together a short sale package, that will containg your listing agreement, 2 years tax returns, 2 months bank statements, 2 paystubs (2 seems to be a very popularnumber with the loss mitigation folks), a hardship letter and of course an offer on your property...your lender will want to see a preliminary settlement statement based on the offer that has been submitted for your home, from an escrow company. This will allow the bank to see how "forgiving they will be". Your realtor may be able to give an estimate of what they think that amount will be, which you can put in front of your tax person in advance, so they can give you an idea of what the IRS will be willing to do.
Short sales are kind of a pain in the butt, but they are worth it in the long run.
Hope this helps