Remember, I am not a CPA or an attorney, so take this advice for what it's worth... nothing, but at least you will be educated when you speak with your CPA and/or Attorney.

 Here is a quick and simple assessment to see if you qualify to be exempt from paying taxes on the amount of 'canceled debt' from the 1099-C, which you may receive after completing a short sale.  If you do a short sale you will not be required to pay taxes on the loss if you receive a 1099-C when:you live in the home (it is your primary/principal residence). 
 

You purchased the primary residence and never refinanced or pulled out any cash for purposes other than improving your home.

You do/did a short sale between 2007 and 2012.

The amount short sold is less than $1M (single or married filing separately) or $2M (married filing jointly).

*****REMEMBER: I AM NOT A CPA, THIS IS JUST A QUICK GUIDE!

 From the Mortgage Debt Relief Act regarding what debt qualifies: "...debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. In addition, the debt must be secured by the home. This is known as qualified principal residence indebtedness. The maximum amount you can treat as qualified principal residence indebtedness is $2 million or $1 million if married filing separately."

 Option 2 (or option B if you like letters better) would be to sit down with your CPA and find out if you would be considered insolvent at the time you short sale the home.  

**Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.

 Finally, if you do nothing and the home is foreclosed, you will still receive a 1099-A.  The bad part about a 1099-A is that the Mortgage Debt Relief Act only applies to the 1099-C you would receive in a short sale... so you must prove insolvency in order to not be liable for the taxes on the amount of loss shown on the 1099-A.

 In my opinion, if you purchased your home and never refinanced and owe less than $1M single and $2M married, it makes no sense to try and keep your home if you really are in a tough spot. 

 The only consequences which may be of a concern to you is your credit.  But a foreclosure is WORSE than a short sale, but for my clients, this is the best part!  We are VERY successful at removing lates and derogatory comments on credit and even have successfully removed FORECLOSURES!  And this ain't no 'short term fix', this is permanent!

 In every case, please, PLEASE seek out the advice of a competent CPA.  and he will make it clear to you which option is best for your own financial situation.
 

Written by Trent Chapman

Jeanette receives on-going coaching and training through "The Short Sale Genius" program  which was created by Trent Chapman and Lee Honish, who was the loss mitigator for a major national bank.  Both are CA resident's.