Why do you get a 1099 with a real estate short sale?

Answer 1

Because the balance that is basically forgiven is considered income.
Example: If your mortgage is $100,000 and you sell your home for $80,000. $20,000 would be the amount that you should have had to pay off but it was forgiven or covered by private mortgage insurance (pmi) so you were basically paid $20,000 by having that insurance.

Answer 2

Because you realized a profit. Plain and simple. You borrowed $200K and only paid back $180K, That's $20K in your pocket, whether or not you get to walk away with it, thanks to decreasing values.