Taxes and Foreclosures? HELP!!

[G F]

Hi all,

I am hoping someone can help me understand something regarding foreclosures. About a year ago, my sister and brother in-law just walked away from their house on Long Island, NY (Suffolk County). They, like so many folks never should have been approved for a mortgage. Here is what I know. Cost of the house $375,000, moved in October 2006. They put 3% down. Had what they called a "regular" mortgage. Then what they referred to as a "little" mortgage, which was the 3% they put down, so in theory, they ended up putting nothing down. (I don’t own a home, so it all sounded odd to me, but have heard that was not uncommon in the last few years) The house needed a TON of work, and then never had the money to do anything. They house is in bad shape. They fell behind on their mortgage and all bills. Fast forward to September 2008; where they just walked away from the house; moved out in the middle of the night, done.

The past year has been difficult for them. They went back to renting an apartment with their one child, a baby boy. My concern is this: I have heard that they will at some point owe taxes on the difference of the eventual sale of the property. Meaning, the house cost them $375k - if the house sells for $275k, there is difference of $100,000. They will not be responsible for that portion of the mortgage loan, $100,000, but they will be responsible for the TAXES on that difference. IS THIS TRUE??? I am sick to think my little sister has gotten herself into such a horrible mess. Please help provide any light you can on the situation. I have heard this is true and I have heard it is not true. Any experts or specialist out there who can give me a definite 100% answer??

Thanks go much!
G