For a person about to lose their home to foreclosure, this information is important.
Prior to 2007 a seller would have to pay capital gains on the portion of their loan that a mortgage company writes off for them to sell their home in a short sale. Today, “The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.” This change is effective 2007-2012.
For more information, see: http://www.irs.gov/individuals/article/0,,id=179414,00.html
I am not a tax professional, so please consult with a tax professional before making any tax decisions.