A short sale is a sale of real property, in which the sales price is less than the mortgage on the property. For example, let’s suppose Dave has a house, but owes the mortgage company $100. The house is worth $60. In order to avoid a foreclosure, Dave can ask the bank to allow him to sell “short”, thereby allowing him to sell the house for $60 (or less), and walk away from the sale. Because the sale was for less than the loan amount, there is a “deficiency” of $40. The bank may forgive the remaining $40 balance of the note. In most instances, Dave will have a taxable income of $40 for the amount of the forgiven balance (called a 1099). In other cases, the bank will not forgive the deficiency, and they may sue Dave for the $40 deficiency.
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