Short Sales can be good if you understand that you may have a tax liability after. If you short sale your property and the bank settles for lets say 100k and you owe 180k, they will 1099 you for the difference, 80k. So technically you will have made 80k more that year but not paid any taxes on this income in the IRS's eyes. So to prevent this you have to either have a knowledgeable CPA or tax person to help prepare your taxes that year to see if there are any exceptions under the tax code for you. Remember, just because your neighbor did it and didn't owe doesn't mean you will have the same outcome. If this is your only debt and you have no other financial problems then a short sale may be the best option. But not if you are going to incur a $50,000.00 IRS obligation.

 

If you believe that you will have a tax obligation on a short sale or you have other finical and debt issues then the best solution is to file bankruptcy. If you file bankruptcy you will not have a tax liability even if you short sale the house after filing. So what a lot of my clients will due is seek tax advice and if they find out they will have tax liability after the short sale they will come file chapter 7 bankruptcy first and then short sale the house to just get it out of their name after filing.

Why short sale the property after bankruptcy? To get the property out of your name and keep the mortgage company from mucking up your credit report with a foreclosure. Also so future mortgage lenders will see that you mitigated your issues with the house and be more willing to write you a loan in the next 2 years.