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. The bank will 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).
