What Does the IRS Say About a Short Sale

After the completion of a short sale on your primary residence, your lender will typically issue a 1099-C which cancels or forgives the debt.
The Mortgage Debt Relief Act of 2007 will typically allow you to discharge canceled debt from your principal residence from a short sale completed in 2007 through 2012.

To verify this information, you should consult your tax attorney, CPA, tax account or the IRS at 1-800-829-3676.

http://www.irs.gov/individuals/article/0,,id=179414,00.html