When you sell your home as a short sale or you go through a foreclosure a 1099C will be issued. As we know a 1099 is issued to show that money was received and generally there are taxes owed on these funds. However in 2007 The Mortgage Debt Relief Act was passed, originally it was set to expire December 31, 2009. Just before the election an extension was granted into 2012.
In short the Act gives you the relief from these taxes under many different circumstances – reading the Mortgage Debt Relief Act summary on the IRS website will give you the power to know how your 1099 affects you. In the majority of the short sales and foreclosures the home has been your primary residence and this in particular is discussed in the Act.
I am a real estate broker and not a tax adviser, and am not attempting to give you tax advice. Knowing, that there are options and programs will give you the knowledge to know what questions to ask and where to take these questions to.
Again – I refer you to The Mortgage Debt Relief Act the power of knowledge can take a lot of the stress out of the short sale or foreclosure you may be facing.