A short sale of one’s home is different than we use the term ‘short sale’ when referring to stocks. When you sell a stock short, you sell a stock you do not own, and hope it goes down so you buy it back at a lower cost.
A short sale of a house is when the sale price is not enough to cover the mortgage balance and the bank just accepts the sale price forgiving the balance owed. I wrote back in November that the unfortunate seller still had another issue. He had to pay tax on the forgiven amount. Now, thanks to the Mortgage Forgiveness Debt Relief Act of 2007, there is a three year exclusion for this situation, and no tax is due.