Enough has been said about the path of the transaction so I'll just shine a light on a few points:
1) In your question you stated:
"We begged for an ext from the seller's realtor. She says it's not the bank that's preventing it, it is the seller because he wants a tax break from the 2007 tax act that will expire Dec31. I work for a CPA & he says that law does not even affect Calif because CA is non recourse anyway."
I think you may want to talk to your CPA again. In CA, I believe the non-recourse protection only applies to purchase money loans; if the Seller ever refinanced during ownership non-recourse protection is gone.
Now, come Jan 1, 2013 Senate Bill 1069 [ Cal. Code of Civ. Proc. Â§ 580b(c) ] kicks in whereby Homeowners who default on their refinance loans (one-to-four residential units) are protected against personal liability for any deficiency following foreclosure. The anti-deficiency protection, however, DOES NOT extend to any cash out in a refinance. This new law only applies to refinance loans or other credit transactions used to refinance a purchase money loan, or subsequent refinances of a purchase money loan, that are executed on or after January 1, 2013.
The federal Mortgage Debt Relief Act of 2007 allows taxpayers to exclude income from the discharge of debt on their PRINCIPAL residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief. This provision applies to debt forgiven in years 2007 through 2012. California has a similar law enacted April 12, 2010, SB 401, called the Conformity Act of 2010 covering January 1, 2009, and before January 1, 2013.
2) In your reply to Kawain you stated:
"There is no paperwork that I signed stating a deadline. Back in August, when we originally signed a contract to buy it, it states escrow will be 45 days from acceptance, however we had to wait until the bank approved the short sale, which was only recently"
Ask your RealtorÂ® for a copy of the Short Sale Lender's Approval letter - these always have due dates! The 45-day close of escrow clock starts once your RealtorÂ® receives a copy of the approval.
3) I really do not understand why the Seller is pressuring you; personally, as a Seller in a distresses sale position I would simply change the listing status to "Pending, Show for Backups" with "Cash Only" and "Escrow must close by 12/31/12" disclosures to increase the likelihood of closing before the end of the year just in case you are unable to do so. Wouldnâ€™t this be best for everybody involved?
In any case, good luck! -Steve