A “short sale” occurs when a property is sold for less than the amount owed by the borrower. A short sale can only occur with the lender’s approval. A short sale typically gets approval before a foreclosure if the lender thinks it will save money by agreeing to the short sale rather than having to go through the foreclosure process. (A earlier post written discusses the costs of foreclosure and reasons why foreclosure mediation might help.)

A short sale does not mean a homeowner automatically has capital gain liability but may mean tax liability as the lender is likely to issue a 1099 on the “income” attributable to the borrower by the sale for less than what is owed. If have questions about why a short sale may be good for you (or why some investors might purchase at a short sale), Mortgage News Daily has a list of frequently asked questions. In some states, the lender can obtain a deficiency judgment against the borrower so you can see that it would be very important to discuss whether a short sale is a viable option with your attorney–in case your state allows such a judgment.

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