Here was how the seller benefited from the short sale:
Benefit #1: The seller was able to walk away with the debt wiped out completely. The FHA short sale guidelines released them from the first mortgage debt. The second mortgage also gave them a complete release. At first, they weren't willing to do that. But we offered them a little extra money in return for a complete release. Fortunately, they agreed to it. This meant that the seller was able to completely wipe out a total of $80,000 in upside down debt.
Benefit #2: Limited Tax Consequences. The seller will only owe taxes on approximately $30,000 of the loss. Why? Because that was around how much money was borrowed on a home equity line. The Mortgage Debt Relief Act of 2007 states that you will not owe taxes on a loss if you used that money to purchase or remodel your home.
However, if you borrowed and used the money for something else, then you would owe taxes on the loss. You would owe the money whether you short sold, or the lender foreclosed. This is only my opinion after reading the law. I recommend that you talk to a competent tax professional before making any financial decision.
Benefit #3: The will be eligible to buy another home in two years. Current Fannie Mae Rules allow homeowners to buy another home two years after a short sale. Compare that with the 5-7 year wait after a foreclosure.
Benefit #4: The sellers paid no money for the short sale. Everything was paid for by the lender. The short sale lender paid the real estate agent, title company, and all the other fees. They can look forward to getting their financial life back on track.