Since we have been on the topic of short sales we've begun receiving various questions related to short sales.
So, "Do you have to pay back the difference on a short sale?" I say should you have too and at one time you did. But currently you do not.
As long as the short sale occurs before 2012 you will not have to pay income tax on the amount of debt that is forgiven. At first the Mortgage Debt Relief Act Of 2007 waived the income tax rule forgiven debt through 2009, but it has been extended to 2012 as part of the $700 billion bailout bill. As much as $2 million worth of forgiven debt is protected from income tax for married couples who file a joint return and up to $1 million for individuals.
So for now your off the hook, but if you don't pay for it someone will have eventually...maybe your children in the future.
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