1. What is a short sale? 

It is the sale of a property where the sale proceeds are insufficient to fully pay off the total amount due.  In other words, after paying for escrow, commissions and other costs of sale, there are not enough proceeds left to pay the lender the total amount they would otherwise be due.  Watch our viedo: 

2.  Will I owe taxes as a result of the short sale?

The answer to this question depends on your situation and requires some detailed calculations--so this answer is overly simplified.  In general, the IRS treats the cancelation of debt that you owe as income to you, unless an exclusion applies.  In other words, if the lender forgives some of the debt you owe to them, the forgiven debt may be treated as income to you, unless there is an exception.  There are several exceptions.  The most important can be found in the 2007 federal law called the "The Mortgage Forgiveness Debt Relief Act and Debt Cancelation".  The Act provides that if (a) the debt is the loan for your primary residence, (b) you used that loan to purchase, build or substantially improve the home, and (c) the amount of debt forgiven is $2,000,000 or less, the forgiven debt is not counted as income--you will not owe taxes on it.  If it is a second home, vacation home or rental/investment property, or if you refinanced and took out additional debt, the answer may depend on other calculations and/or exceptions, such as whether you are insolvent or whether the debt is discharged in bankruptcy.  The calculations and analysis can get complicated and require that you look at things like your adjusted value in the property. For more information, please see the following IRS article on The Mortgage Forgiveness Debt Relief Act and Debt Cancelation  IRS info link and Publication 4681. 

3.  Will I get a 1099 after the sale? 

You should.  Some agents will tell you its negotiable--that you can ask the lender not to issue the 1099 and not report the debt.  I do not recommend this approach.  The bank is supposed to report it and negotiating a resolution where they "don't tell" the IRS is a risky strategy that can possibly lead to IRS fine, fees and penalties later on.

4.  Do I need to report the forgiven debt to the IRS?

Yes.  The federal form is IRS Form 982.  Form 982

5.  Does the bank have to agree to the short sale?

In order to complete a short sale, the bank(s) must be willing cooperate.  Banks now how short sale departments (often call loss mitigation departments).  Most banks have a standard application process.  The lender reviews things like your your tax returns, income information, bank statements, etc.  These items are put together and submitted to the bank as the "Short Sale Package". The lender reviews the package and then makes the decision whether to approve the property for a short sale.  Once approved, you can proceed with the sale of property.