Can Banks report $ forgiven via ShortSale/Foreclosure as Income for Borrower?

[NotWorthAsking]

Hi All,

We recently have been looking into possibly doing a short sale or foreclosure on our home (details below). I heard from an "expert" that they have heard several of their clients were being hit with major taxes after their short sale because the banks report the difference between the loan amount vs the short sale amount as "income" for the borrower.

Is this legal and/or likely to happen?

Our home was purchased in Dec 2006 for $334,000, and we just received this year's appraisal from the assessor's office (determining CA property tax) showing it valued at $130,000. We only have $10k paid in principal at this point, so the value to loan amount ratio is approximately 249%.

Also we would appreciate any advice as to whether you think it makes more sense to stay in the house, or get out of the loan (foreclosure/shortsale) and just rent for a few years, saving up all the money from the difference between our mortgage payment vs. rent.

Thanks!

[Paul Molinaro Esq.]

NO LEGAL ADVICE HERE - JUST GENERAL INFORMATION - ANY SIMILARITIES TO ANYONE'S ACTUAL SITUATION IS JUST ONE HECK OF A COINCIDENCE.

The question is best asked of a CPA as each state law may have its own laws as to how forgiven debt is taxed. The IRS deems forgiven debt as income, but there have been some exceptions made recently for home loans.

- Paul