The Mortgage Forgiveness Debt Relief Act of 2007 expires on 12/31/2013. This Act allows a home owner to not have to pay taxes on the amount of money forgiven by a mortgage company on their residential home. This Act has several exceptions, one of them being that it does not cover anything but your primary home.
Here is how the Act works. If the mortgage amount was $400,000.00 and you sold the house in a short sale for $300,000.00, you had $100,000.00 income according to the IRS. You would pay taxes on the $100,000.00 "income". So, next year when you do your tax returns, you claim $100,000.00 as income. You could be paying tens of thousands of dollars in taxes. The Act states you don't have to pay the taxes on your primary residence. Since the law is expected to end on 12/31/12 try to get the forgiveness done this year in case the Act is not extended. If the Act is extended, you have more time to sell your house.
If you have any questions, please let us know.