A “short sale” is the sale of your home for less than the note. Real estate salespeople advertise it as a solution; however, remember that they are making a commission, and they may or may not be competent to arrange the transaction.

The problem with short selling your home is a combination of false expectations and lack of understanding the legal consequences.

False Expectation: Is a short sale simple? No, it requires a knowledgeable and competent realtor and lawyer. Will it relieve you of the deficiency on the loan? Maybe, but there are tax consequences. Will it be easier on your credit rating? Some benefit but no total fix. Will you feel more moral or ethical than you might in a foreclosure? Your call; however, this is your emotional response. That counts, but it is not a business consideration.

First: A short sale results in a deficiency: the difference between the debt on the property (note) and the sales price. Two results: the lender “waives” the deficiency. If you have a second mortgage, another waiver needs to be secured from that subordinate lender also to be free of deficiency, and remember that the second mortgage holder will gain nothing from the short sale because all sales proceeds will go to satisfy the first mortgage. If there is a waiver, the lender will issue a IRS 1099-C, and the waived amount is taxable as regular income. There is an escape – the “qualified primary residence exemption” under current federal law which does not count as taxable that portion of the waiver that represents the purchase, repair or improvement of the property. If you used a refinancing or second mortgage (including “home equity lines of credit – HELOC) for any non-house purpose, it is not excluded and is taxable. This exclusion needs annual Congressional approval which has become speculative.

Second: A short sale is a sale: it involves other players and is largely not in your control. A realtor will be listing and showing your house. The lender will determine the qualification of the buyer. You will find out about the waiver of deficiency at the last minute. You will have to vacate when the sale closes. In contrast, using legal means to delay a foreclosure means that you have more opportunity to plan and leave when you want to leave.