If you find yourself unable to pay your mortgage, you may be looking for ways to prevent foreclosure. One way to do so is selling your home through a short sale. This type of sale allows you to accept an offer for less than your mortgage’s outstanding balance. While this releases the lien on your home, your lender may not forgive the difference between your home’s sale price and the loan’s value. And short sales can also have tax implications that will cause further financial headaches.

Deficiency judgments

Lenders often use deficiency judgments to pursue the difference between the price of a short sale and the remaining loan debt. These judgments are not automatic, and lenders must motion to receive one against you. Yet, some short sale contracts include a deficiency waiver. This exemption prevents your lender from pursuing the remaining debt altogether. If this clause is not in your contract, you will have to file a motion to overturn the deficiency judgment if your lender pursues collection.

Tax consequences

If your lender forgives your deficiency, you will receive a 1099-C form from them after your short sale. This form acknowledges the cancellation of your remaining mortgage debt. And your cancelled debt then becomes part of your taxable income. Yet, you may now be filing bankruptcy. Or, you may have been in the process of doing so when you sold your home. In these cases, your cancelled debt will receive discharge during your proceedings.

Short sales may seem like a smart way to avoid foreclosure. Yet, they often come with financial burdens that could add strain to your situation. By understanding the consequences, you may reevaluate whether a short sale is a sound choice in your position.