After a short sale is completed your lender may send you a form 1099-C if they have forgiven the deficiency or have waived the deficiency. This is called a "discharge of indebtedness" and it used to have tax consequences. The Mortgage Forgiveness Debt Relief Act of 2007, provides that as long as the deficiency was from a mortgage that you used to originally buy your home, then there is no tax, as long as the amount forgiven is less then two million dollars. Also, you must have lived in the home for at least 2 years. If you receive a 1099-C after you have completed a short sale, we advise that you speak with an accountant. Tell your accountant to review section 108 of the Internal Revenue Code for specifics. Bottom line, there should be no tax on this type of forgiveness. A printable overview is attached below.