Housing Counselor Certification (HUD) Practice Exam

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What is one major risk associated with opting for a short sale?

Complete loss of all equity
Potential tax implications on forgiven debts
Immediate eviction
Longer sales process

The correct answer is: Potential tax implications on forgiven debts

Choosing a short sale can indeed lead to potential tax implications on forgiven debts. When a property is sold for less than the amount owed on the mortgage, lenders may forgive the remaining balance, which could be considered taxable income by the IRS. This means that homeowners might face unexpected tax liabilities when the lender accepts less than the total amount owed, and the borrower is relieved of that debt. Additionally, while a complete loss of all equity can occur in a short sale situation, the key risk that differentiates it from other types of sales is the taxation of forgiven debt. Immediate eviction is not a direct consequence of a short sale, as the homeowner typically remains in the home until the sale process is completed. While a longer sales process may happen in a short sale due to the need for lender approval, it is the potential tax consequences that stands out as a significant risk for those considering this option.