I understand that the bank will send a 1099 to the seller for the amount they write off on an approved & closed short sale. The amount that is being writtin off is $100,000. My seller can't afford to pay the IRS income taxes on this amount. My client now says, we might as well foreclose, we're toast either way.

Seller says either the mortgage OR the taxes are going to bankrupt them so they might as well give up.

What advice would you give? TIA!

op here again. I think the tax consequences will be wiped out by this: The Mortgage Forgiveness Debt Relief Act and Debt Cancellation http://www.irs.gov/individuals/article/0,,id=179414,00.html

Am I right? TIA!

I'm not a CPA, but have done a bit of research on this topic. The bank will send your client a 1099, but this taxable income is tax exempt if the loan balance is less that $2 mil and it's their primary residence. Also, the loan must have been used to buy, build, or improve a primary residence.

Possibilities for tax exemption from forgiven debt:
*Qualified Principal Residence
*Bankruptcy
*Insolvency (total debts outweigh current market value of assets)

Have your client talk to a CPA. I frequently reference the IRS publication 4681: http://www.irs.gov/pub/irs-pdf/p4681.pdf

Have your client review this document and come to their own conclusion or even better, consult with a CPA. Educate yourself a bit on insolvency as well - it saves the majority of people from pay taxes on the forgiven debt, regardless of the details of the loan(s).

Thanks for the info! I read that link & forwarded it to my client.