I never say your 1st statement. I do encourage them to ask a CPA about IRS section 108.
In this specific case, I've had clients use insolvency / IRS form 982 and not have to pay taxes. Of course, it will depend on the assets / liabilities of the borrower.
From the IRS website:
Is Cancellation of Debt income always taxable?
Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:
Ok -- got it. We do need to be careful on the tax / deficency issue.
Have you ever had a situation where a homeowner didn't qualify for either exemption?
I "almost" did. =)
First, it is principal, not principle. And yes, we should have all known that or we should not be doing short sales.
I don't even venture into whether or not they will owe taxes. My standard line is, "We encourage EVERY SELLER to take their approval letter to their accountant to make sure there are no tax ramifications on the sale of their property." I'm not a CPA and have no idea what will happen post closing, so I don't even try to explain that.