Tax Implications of a Short Sale
There is a plethora of information available regarding foreclosures, short sales and deed-in-lieu of foreclosures. Where does someone start? My recommendation is to speak with a qualified tax accountant or CPA, of which I am not. However, here is start of some good information regarding the tax implications of debt forgiveness from the disposition of your personal residence.
Please keep in mind you could have a taxable event if your home sells in a short sale or foreclosure for less than the outstanding loan amount. There is a possibility the lender could even pursue a deficiency judgment from you in satisfying the difference between the two. This is a possibility, but it does depend on whether you refinanced or have a second mortgage (see blog entry Refinancing and Recourse vs. Non-Recourse Loans). There is also the chance a lender would not pursue a deficiency judgment because of the fact they have a lack of resources in doing so.
When you speak with your tax accountant ask him or her about IRS Form 982: Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment). You may be able to file this form with your tax return and relieve yourself of the tax implications.
With that said here is a site that may be helpful in your quest: