As a Certified Distressed Property Expert, I spend most of my day talking with homeowners facing foreclosure or talking with lenders trying to negotiate "short sales" for our clients.  I get many questions about the tax liability of foregiven debt on these short sales.  This is sometimes referred to as the "phantom tax" or "gap tax."  The "gap" being the difference between what is owed on a mortgage loan and the lesser amount which the lender agreed to accept for the sale of the home.  This is also where the term "short sale" or to "sell short" is derived from.  While I try to answer these questions the best I can, I must advise my clients that I am not a tax professional or Attorney, so they must seek these professionals out for answers to many of their questions.  The one thing I can do is refer them to the appropriate professional and provide them information on the subject.  Below is the IRS website, which discusses The Mortgage Debt Relief Act of 2007 and will answer most of your questions about the "gap tax."  Please follow the available links and print out the information for your files.  If you still have questions about any tax consequences you may suffer as a result of a "short sale," please give me a call and I will refer you to the proper professional tax advisor who can answer all your questions.