Because the Mortgage Forgiveness Debt Relief Act survived the fiscal cliff negotiations and was extended through the end of 2013, homeowners who sell their primary residence in a short sale will not have to lose their home and then pay taxes on the loss up to $2 million — $1 million if married filing separately. While neither of these options are ideal, there are circumstances where a short sale is wise, even for high-income earners. It may cost you more in the long run if you hold out for a great offer instead of biting the bullet with a short sale. For instance, if you end up having to rent your home and move somewhere else, the rental is no longer your primary residence and you forfeit the chance to exclude forgiven debt from your income. Doing a short sale later would be very costly, since the forgiven loss amount is tacked on to your regular income. For instance, a couple with taxable income of $200,000 who had a loss of $100,000 would move up to the 33 percent federal tax bracket and owe an extra $30,000 or more in federal taxes. If you can absorb a credit score hit and do not plan on making any major purchases in the next few years, a short sale might be a good option. However, if you plan on buying that could be a different story, but even then it might be better to lose some credit points rather than stay in a house that is dragging you under. Banks do not have to approve a short sale, but realtors say banks tend to be more lenient when financial hardship is involved. Another factor is whether you only have a first mortgage or the added complications of a second. The bank may be more willing to grant the short sale when there is only one loan on the property, or the same bank holds both the first and the second. | Read More