Is a seller responsible for any federal or state taxes for a short sale of real property in state of California

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   Barton Strock

   Fort Lauderdale Real Estate Attorney

   Contributor Level 10

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   Answered October 22, 2008 13:09. I cannot answer as to California state taxes but they usually follow the federal tax law. I assume you are talking about income tax on the deficiency on your loan. If this property is your principal residence then their is no tax due on the difference in the amount of the loan balance and the amount you actually pay. When a loan is forgiven in part the Interenal Revenue Code defines that as income. Last December the Congress passed a law requested by President Bush that exempted the payment of tax on that income if it was your principal residence. If you are thinking about short selling an investment property the tax on the deficiency income can be steep. Foreclosure is probably a better alternative. Contact an attorney or accountant in your state that is familiar with this type of law including taxation. Most lenders will NOT accept a deed in lieu of foreclosure - it is a rarely used vehicle although I always hear "experts" recommend it.

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