Real Estate Law – Short Sale & Taxes
If your house is worth less than you owe and you sell it in a short sale, the bank will issue you a 1099 for the forgiveness of indebtedness and you usually have to pay taxes on that forgiveness of indebtedness to the IRS.
There is an exemption if it is your principal place of residence and you are insolvent, so you won’t have to pay any income taxes to the government.