Ginny, last year was really hard. I got laid off, and we ended up short-selling our home. We thought we were fortunate because we didn’t end up with a foreclosure on our record, so we’ll be able to buy another home in two years instead of five. We knew the Internal Revenue Service wouldn’t tax us on it, under that temporary law.

But I just did my taxes and we actually owe the state more than $25,000 in income tax because of our short sale. We thought we were doing the right thing by not just letting the house go, but it looks like we’re going to be penalized for that after all. Hal S.

Hal, the reality is that when you are upside down and get laid off, there is simply no easy solution without implications. This is especially true if you decide or realize that you can no longer afford the place, even if you were offered a modified payment (which isn’t the easiest thing in the world to obtain, even if you could afford it).

Now, as with all tax topics, there are lots of exceptions and nuances and fact-specific details to the subject of taxation in foreclosure and short-sale cases, but I’m going to talk in general rules, here.

When you divest of your home through a foreclosure or short sale, the difference between what you owed on your home and the fair market value of the home (normally determined by what the lender is able to recoup through the foreclosure auction or short sale) is technically a debt that was forgiven, inasmuch as you are no longer responsible to pay it.

For tax purposes, a loan that is canceled transforms from a loan into income — and, as you know, income is taxable.

The taxing authorities generally call this form of mortgage forgiveness “cancellation of debt income,” or CODI. With respect to your federal tax liability, per the IRS Web site, “The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure (in calendar years 2007-12), qualifies for the relief.”

However, each state has the power to conform their state tax laws to the federal rule, or not. In California, for example, the legislature has been passing a law that mirrors the federal Mortgage Debt Relief Act on a year-by-year basis. This year, however, this law has not yet passed. The politicos are currently wrangling over it, though, and there are strong indications that it will pass soon.

People in your situation are essentially faced with having to choose between the best of a set of bad options, and you might actually have done that. Letting your home go back to the lender through foreclosure would likely not have been any more advantageous, from a tax perspective, than your short sale. The “forgiven” mortgage debt is treated the same for tax purposes, whether it was forgiven through foreclosure, short sale or even a principal-reducing loan modification.

If there’s a mistake you’ve made, it’s the one you’re still making: trying to handle these matters on your own, without the advice of a local real estate attorney and tax expert.

People facing foreclosure are wise to consult with an attorney or certified public accountant (CPA) before things get too dire: They might be able to help you negotiate with the bank to minimize the tax and other impacts of losing or short-selling your home.

Even at this point in your process, it behooves you to have a tax professional do your taxes rather than try to do it yourself. The few hundred bucks you pay will undoubtedly be cheaper than paying all those taxes. A tax professional — a CPA or an enrolled agent (EA), ideally — can explore the entirety of the state and federal tax code and marshal all of its provisions to your advantage.

For example, even if your CODI is not tax-exempt under a temporary relief provision, you might qualify for an insolvency exemption from the tax if your debts outweigh the fair market value of your assets. But this is something that a tax pro would know that you as a do-it-yourself tax preparer might not..

Homes are selling for less. Everyone’s trying to cut back. Yet, many real estate agents think it’s wise for sellers to provide presale inspections for buyers to review before they write offers. Is the cost, which could run from a few hundred to $1,000 or more, worth the expense?

Last year, a home seller in the hills above Oakland, Calif., did a lot of work renovating a home before putting it on the market. Her agent recommended a home inspection, which involves a more comprehensive investigation of the property. A wood pest or termite report covers damage caused by wood-destroying organisms, and conditions that would be likely to lead to future infestation.

A complete home inspection usually covers the roof to the foundation and everything in between, although this differs from one inspector to another. The seller in the above example was financially exhausted after taking care of the fix-up work and decided against providing a presale home inspection.

The house was priced under market value and showed well. It brought in multiple offers and sold well over the asking price. However, the buyers’ home inspection revealed that the foundation needed replacing. The deal stayed together, but only after a much lower price was negotiated.

Changing the price in the middle of a transaction can be a red flag to the lender, particularly if it’s a significant price reduction. The lender could require the work be done by closing, which could delay the closing by months. If the buyer’s loan commitment expires, the transaction could collapse.

HOUSE HUNTING TIP: One benefit of providing presale inspections on your home is that you have the opportunity to correct defects before marketing the property. This will make your home more salable and increase the odds of a smoother transaction.

Another benefit is that by providing as much information about the property as possible upfront, you decrease the risk of a transaction falling apart when buyers discover information about the property they weren’t aware of when they made their offer.

One seller failed to provide a foundation report to the buyers before they made an offer. When the buyers were given the bad news, the transaction fell apart.

If you have reports on your home, make sure that the buyers receive copies of them before they decide whether or not to buy your home, especially if the reports reveal conditions about the property that could influence the buyers’ decision to buy or what they would pay.

Sellers often see no good reason to pay for inspection reports upfront because the buyers will want to have their own inspectors investigate the property. Buyers should have the property inspected by their own inspectors.

The purpose of getting presale inspections is not to preclude the buyers from having inspections — it is to educate the sellers and buyers about the property condition before they enter into a contract.

Sellers are in control of who inspects their home when they pay for presale inspections. Make sure to use inspectors who are well respected in the area. The buyers’ comfort level with your presale reports will be higher if their agent can vouch for the inspectors.

Even though the buyers will probably do their own inspections, having presale inspections can cut down on negotiations that can occur after the buyers do their inspections. However, don’t be surprised if the buyers ask for something as a concession for removing their inspection contingency.

Recently, buyers of a home in Oakland’s Rockridge neighborhood asked the seller to have the garage roof replaced, even though they were given a roof report and replacement proposal before they made their offer. Their offer was based on taking the property in its present condition.

THE CLOSING: The seller said no and the buyers removed their contingency.

Ginny,  I’m in the process of trying to buy a home. I made an offer on a home that was a short sale and, because there were several other offers and I really liked the place, my offer was above the asking price. The listing agent said I was the highest bidder.

Then, we got a counteroffer from the seller and it was actually for a price lower than the price I’d originally offered! Then, my agent suggested that I make a counteroffer back higher than the seller’s counteroffer but lower than my original offer price.

I am totally lost here — I don’t understand what the seller’s strategy is or what I should do next.  Andrew G.

Andrew, the universe of short sales does boggle the mind! And from the buyer’s perspective, it’s more than a little crazy-making, because so much of what impacts whether or not the short sale will be approved by the seller’s bank(s) (so that you can have your house!) is totally and completely out of your and your agent’s control.

Other than your offer price, you have very little or no ability to impact the bank’s evaluation of the transaction. Rather, the seller’s financials and how they and the offer are presented to and managed by the listing agent are much more critical to the eventual outcome of your short-sale transaction.

Accordingly, one of the factors I look at before showing a short-sale listing to my own buyer clients is the listing agent’s track record of successfully closing short sales.

And interestingly enough, it tends to be the listing agents who have done the most short sales that come up with these deceptively wise strategies, because they’ve learned the hard way what does and doesn’t work, and want to maximize the chances that their hard work will culminate in an approved short sale.

Don’t hesitate to ask your agent to ask the listing agent what their thought process and strategies are behind a seemingly bizarre counteroffer or anything else. If they can be reached by phone or e-mail, often they’ll illuminate you so that you don’t have to feel like you’re just taking shots in the dark with no rhyme or reason.

Need-to-Knows

I’m not sure how much you know about short sales, so I’ll start from the basics: Short sales take a long time. I still hear buyers call them “quick sales,” and constantly find myself correcting that extreme misconception. Where an “ordinary” sale is taking around 30-45 days on today’s market, it is very common for short sales to take four to six months (or even much longer than that) to close.

A year is not unheard of. The “short” refers to the fact that the purchase price is less than — or “short” of — the amount of the seller’s required payoff to their lender(s). As a result, the seller’s lender(s) must approve of all the terms of the transaction before it can close. And sometimes they do, sometimes they don’t. If any lender doesn’t approve of the transaction, the deal will not close.

With that basic understanding in place, you’ll see why short-sale listing agents are very cognizant of the fact that the buyer they get into contract with is not the buyer they may close the deal with. Because short sales take so long and are so uncertain to close, buyers often continue house hunting while they are in contract to buy a short-sale property.

Many will cancel their short-sale contract if they find another place they like more or have a higher certainty of being able to actually buy.

So, when you walk in and make a really high offer to buy a short-sale property, the listing agent is often very wary of taking that offer.

Here’s what they fear: Say, hypothetically, that they accept your offer and submit the contract for approval to the bank(s). One bank approves the terms. The other bank is still considering it. In the meantime, you go off and find another place and back out of the deal.

Now the seller is stuck unable to sell the place at any less than your astronomically high offer price, because the bank has already approved it at that price, and may now believe that any price lower than that is below fair market value and an unacceptable loss for them to take.

Listing agents who have done many short sales have almost always had one experience like this, and know that it might actually be a disservice to their clients to put a super-high offer into contract. It can be the thing that prohibits their seller from being able to sell their home, in the final analysis.

You don’t mention if the seller issued multiple counteroffers, but I wouldn’t be surprised if the seller did, in an effort to get backup offers lined up in case you bail before the deal closes.

If the seller did issue multiple counteroffers, it’s not unusual for the counteroffers to bring the lower-priced offers up some and bring the higher-priced offers down a bit, so the seller can have several people lined up who are all willing to pay a fair, but not outrageous, price for the place.

I’ve also seen short sellers counter back a lower price anticipating that they might need to later request a price increase or cash contribution from the buyer in order to get the banks to accept the offer.

Action Plan

What you do from here is really situation-specific. Make sure that your agent has spoken with the listing agent to get a peek at the listing agent’s and the seller’s thought processes before you respond to their counteroffer.

Some listing agents do expect that you’ll offer slightly more than they countered; others might just want you to accept it, but be aware that you might have to pay more if and when the bank(s) require it.

Either way, don’t get your heart set on a short sale — ever — until every bank involved has approved the deal, and your inspection, appraisal and loan underwriting are complete. And don’t stop looking. Good luck!