A short sale is when a lender agrees to take less than the principle due on your home to release you from the debt obligation. In today's real estate market, many cities are experiencing financial hardship. Financial hardship leads to bankruptcy and foreclosure. Bankruptcy and foreclosure often lead to short sales.

Of course, there is no need for a short sale if you can afford to leave your home on the market. You want to get the most money possible in the sale of your house. Probably the only circumstance under which you should consider a short sale is when you are desperate to sell your home. It may be that you are financially able to weather the loss, but, more likely, a short sale is due to financial hardship.

There are many homeowners who have had a home on the market for some time. Some are tired of waiting, have received a lowball offer and are financially able to take the loss. That's the best case scenario. Others, however, are suffering financially. They've lost their jobs or have experienced medical emergencies or other emergencies that have put them at great financial risk. They need to sell their homes to get out of the mortgage payments. They are upside down in their homes and a short sale looks like a good prospect.

Don't go gentle into that dark night of short sales. Before you do, you will need to ponder a few things. If the lender of your mortgage agrees to a short sale, they will report the account as closed to all major credit reporting bureaus. They will report the account as not paid in full, write off the remainder due on your mortgage as a loss and send you a 1099 for the difference. The IRS will consider the amount on the 1099 as income, and you will be taxed on that amount. If you parley up front, you may be able to negotiate a more favorable settlement with your lender.

When presenting your short sale offer to the lender, make sure you request up front that they report the account as paid as agreed. Get it in writing before you sign. This will eliminate the negative reporting on your credit report. In regards to the forgiven amount on your mortgage loan, the Mortgage Forgiveness Debt Relief Act of 2007 may apply to you. Up to $2 million of your mortgage debt can be excluded from IRS taxation on your principal residence. Up to $1 million applies for those married filing separately. Check with an accountant or the IRS website for more details.

The bottom line is that a short sale may be the only way you will be able to sell your home, and get out from underneath the weighty indebtedness of your mortgage. You may have to take a loss that could impact your credit score and increase your taxes. Make sure you do some heavy duty negotiating before you agree and sign on the dotted line.