Am I liable for taxable income in a short sale vs foreclosure?

If your mortgage debt was discharged in your bankruptcy you will no longer owe the mortgage debts. You can sell your house or give it away and there will be no tax consequences for any deficiencies under the mortgages. I am not a tax expert, but assume that you will have a capital gain or loss on the sale. Check with a tax person.

This question is not entirely clear, but let me see if I can provide some information. Debt discharged in bankruptcy is not treated as taxable income. If you have a short sale, your bank will likely issue you a Form 1099-C reporting the amount of the debt forgiven. That does not necessarily mean, however, that this amount is treated as taxable income. If the debt is as to your primary residence and the debt is forgiven in 2012, the Mortgage Debt Relief Act of 2007 might exclude that amount from your taxable income. I suggest you consult a tax preparer or tax attorney for specific advice on your situation. Note that the Act is set to expire at the end of 2012, although Congress is currently working to extend the Act through 2013. Still, there is no assurance that the extension will pass out of Congress.

I assume since there is still such a housing worry that this is a Chapter 7 bankruptcy and not a Chapter 13, but the answer is ultimately unaffected. The big difference in the world of taxes and foreclosure is Recourse vs. Non-Recourse loans. California is a Non-Recourse state, which is to say that there are laws preventing mortgage companies from collecting any difference between the foreclosure, trustee sale, or short sale value and that of the underlying mortgage. And this is a very good thing for taxes. If a bank writes off money it could have legally collect from you (without regard to whether you had the money, which is really why they would write it off in the first place) the tax man treats it like the bank just gave you alllllll that money as income. And in mortgages in this market it's usually a lot of money to be taxed on. Because California is a Non-Recourse state there is $0 that they could collect from you so your income tax burden is based on $0. You would still be liable for capital gains taxes. Because there is no deficiency allowed you are determined to have sold the property for the value of the loan. Any increase in what you sold it for and what you bought it for (for example of there were negatively amortized loans or refinances with a greater principle) then there would be capital gains to consider. There are limits that you would have to exceed and writes-offs you may or may not have taken, and could take for income put into the property, but those are the details you would have to talk to someone about in person.

There's no need for a short sale once the debt is discharged.

Yes. A short sale is taxable event. The banks send out 1099's on the shortfall.

There is a tax exemption which you can use on your income taxes for this loss.

No. The loan was given by the discharge not a short sale.

Don't wait for the bank to foreclose. List the property and attempt to get a short sale agreement with your lender ASAP. The Debt Forgiveness Act, which protects against the tax consequences of debt forgiveness, is scheduled to expire at the end of this year. While Congress may renew the act, there is no guarantee. It is better to move quickly in order to be protected this year.

The discharge would protect you from the income tax liability if there is one. However, the bank may still issue you a 1099. If you receive a 1099, make sure you file the proper tax forms which will negate the 1099.

Why do you want to get your name off of the title? It doesn't really help or hurt you either way. A short sale also really won't help or hurt you unless you sell the house for more than the loan is worth, in which case that income would be taxable just like any other sale. You wouldn't be reassuming the debt by doing a short sale, but given you already had your liability on the loan discharged, the short sale would probably be more hassle than it is worth for you to do.

Wow - far too many questions to answer without a lot more information. The problem is that I would have to assume information not in your e-mail in order to answer one question. If that assumption is incorrect I would give you bad advice. You really need to talk to a competent bankruptcy and real estate attorney to work through each of these questions. Sorry for this answer.

You will need to consult with an accountant conserning the tax liability. You will not become liable under the loan, the discharge protects you.