The tax implications for the borrower could be so significant that a short sale would not be in the borrower’s best interest.  Before a short sale is contemplated, it is strongly recommended that the borrower seek the advice of a professional tax advisor.
 
Generally speaking, any relief of indebtedness from a short sale, regardless of whether the loan is a recourse or nonrecourse loan, is taxed as ordinary income. There are, however, some exceptions to this rule that may benefit a taxpayer involved in a short sale.  For more information on the tax implications of short sales, see the CAR legal article, Taxation of Foreclosures, Deeds in Lieu of Foreclosure, and Short Sales.

Remember, this is information specifically geared toward California residents and sellers and buyers should always consult a tax advisor before making any financial decisions.
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