Are there any income tax consequences on a short sale? No, not this year at least. Last year, Congress extended the exclusion for another year. If they had not extended it and you sold your home as a short sale, the lender would have reported the forgiven debt amount to the IRS as income. The lender would have sent you a Form 1099-C reporting the forgiven debt amount. You would then have to claim that amount on your income tax return as a gain.
For example, lets say that your mortgage balance is $600,000. The lender is able to sell your home for $500,000 in a short sale. The amount debt that the lender has forgiven is $100,000. This is the amount that gets reported to the IRS and on which you have to pay taxes. However, since this exclusion has been extended until December 31, 2013, you won’t have to claim it as income on your 2013. However, if your short sale occurs in 2014, then you will be liable for taxes on the forgiven debt.