What is a 1099 in real estates short sale transaction?

Answer 1

Here's the URL of the IRS publication explaining it. It's an "informational" form only (i.e. you don't attach it to your tax return), but the information needs to go on your tax return -- it's the amount the lender loses on the loan in a short sale.

http://www.irs.gov/pub/irs-pdf/i1099ac.pdf

If you sell "short" meaning less than you owe on a loan, and the lender ok's it, that means that the lender is taking less than it's owed. The IRS traditionally has said where a lender "forgives" a debt (i.e. agrees to take less than it's owed), the IRS considers the amount "forgiven" as taxable ordinary income to the borrower. It's a nasty place to be. So if you're in a short sale situation, you need to consider the possible negative tax consequences.