SHORT SALE SCENARIO
I have a Seller who has gone into Default on their mortgage payments. The current value of the home has dropped 50K below what is owed. They are considering doing a short sale to redeem their credit before more damage is done. After contacting the bank, Suntrust Mortgage, I have been told that they would consider all offers on the home as payment towards the pay-off. The difference, however, would not be forgiven but still owed to the bank. Here is the dilemma: let's just say the bank did forgive the difference and wrote the couple a 1099 for the amount forgiven. They would have to claim it as phantom income on their tax returns and pay 32% back to the government for the gain. Does this make sense? Either way, it seems to be a lose - lose situation. What am I not seeing?