At least, that’s the case for the vast majority of homeowners in the Phoenix area who either have short sales in progress or are considering a short sale in 2014.
I’ll leave the experts to provide the full explanation; the cliff notes version is Arizona is a non-recourse state – in other words, lenders can’t pursue a judgment against a homeowner after a foreclosure here, unlike other states – and purchase money home loans are non-recourse in nature. In the majority of cases, when a house is sold via a short sale and it’s secured by a purchase money loan and that loan is non-recourse, no debt actually is forgiven. And it’s the forgiveness of debt that triggers a 1099 and possible tax consequences.
Now, as I’ve said before, I’m neither a tax advisor nor an attorney and there are exceptions to everything. For the best information on your particular circumstance, talk to an expert – if you need a name, call or e-mail me and I can help.
At the same time, don’t listen to real estate agents who are telling you the world is ending because the Mortgage Debt Relief Act is ending. It mattered little here in Arizona when it was enacted and its expiration means equally little.