This is a great question and one that I am asked by clients on a daily basis. Whether you will pay taxes on the short sale is determined by a number of factors including but not limited to whether the home is a primary residence or investment property. For questions about the tax consequences of a short sale, it is imperative to consult with a CPA who has experience in short sales.
As for the deficiency judgment, your realtor or attorney involved in the short sale can negotiate with the lender to waive any deficiency remaining after the short sale. Typically, a good short sale real estate agent will negotiate a deficiency waiver. However, be sure to obtain the waiver in writing before agreeing to the short sale.
Best of luck.
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