When real estate is sold via a short-sale, special IRS rules apply. Details regarding capital gain treatment for short-sale transactions are outlined below.

Even if property used to cover a short-sale was held more than the short-term holding period, under Code Section 1233(b) capital gain on the short-sale is treated as short-term capital gain if the seller owns substantially identical property for not more than the short-term holding period.  If property covering a short sale was held not more than the short-term holding period, capital loss on the sale is treated as long-term capital loss if the seller owns substantially identical property held for more than the short-term holding period.