Investor ponders short sale's long-term risks

Home Sale Hindsight

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Q: I owned a parcel of raw land as investment property in Arizona until last month, when I sold it via a short sale. My $230,000 1099 is en route. My battle with the IRS will start in 10 months … fun! I’ve researched it and found that Arizona is a non-recourse state, but that doesn’t apply for the investment property. Any advice? –D.S. in California

A: Hmmm. Raw land, huh? Well, recourse vs. non-recourse (the issue of whether your lender can/will sue you for the deficiency) is a different but slightly overlapping issue from the tax issue (whether state or IRS will impose tax on CODI, or "cancellation of debt income").