You Can't "Short" the I.R.S.

A lender may have an incentive to approve a short-sale of unproductive (and expensive to maintain and sell) property, especially in today's market. Our good friend, the IRS, does not have such incentive. It's important that sellers of property take that into account when they decide to do a short sale. There are some huge benefits to the short sale, i.e. avoiding larger credit problems, but there is also the disadvantage of having to justify the numbers to the I.R.S. For the seller, find out if it is a recourse loan or a non-recourse loan. I.R.S. Publication 544 talks about the differences in potential gain where the loan is recourse. In that case, the fair market value of the property plays a significant role in determining gain, or loss.