U.S. law - Mortgage Forgiveness Debt Relief Act of 2007 - applies to debt forgiven in calendar years 2007 through 2012 - including possibly debt forgiven through SHORT SALE process.
The law allows exclusion of income realized as a result of modification of the terms of a mortgage, or foreclosure, on your principal residence, for those who qualify.
Any person participating in a SHORT SALE and whose property qualifies under the Mortgage Forgiveness Debt Relief Act of 2007 will need to get that property sold and closed escrow before the end of this year 2012.
Some forgiven debt is taxable. This U.S. law - Mortgage Forgiveness Debt Relief Act of 2007 - provided tax relief to many people who own property and participate in SHORT SALE. 
When people qualify according to this law - Mortgage Forgiveness Debt relief Act of 2007 - the amount of debt to the lender that is forgiven in the short sale would not be taxable.
People who are on the fence about listing their homes for SHORT SALE need to get those on the market now and as soon as possible.
A home listed for SHORT SALE too late during this year of 2012 will probably not get successful conclusion by the end of 2012 (signed purchase contract, delivered, concluded with close of escrow by the end of the year).
It's important for any home owner/seller considering a SHORT SALE to list the property as early in the year as possible — especially since the short sale approval and completion process can take anywhere from 4 weeks to 12 months.
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Source of some information is Melissa Zavala - www.ShortSaleExpeditor.com. This is for information only and not the providing of legal or tax services. To find out about your own possible short sale and tax situation, you must consult with a tax attorney or experienced income tax professional in your community.
HARRISON K. LONG – REALTOR® and broker associate, GRI – Coldwell Banker Residential Brokerage – 949-854-7747 (phone) – ExploreProperties@gmail.com (email) – CA DRE 01410855 – SFR short sale and foreclosure resource certified by the National Association of REALTORs® – now serving as an appointed director at California Association of REALTORs® – also a lawyer licensed by the California State Bar, member #69137.
Professional REALTOR® agent representation and help for property owner/sellers, private trust estate representatives, estate administrators and executors, probate and trust attorneys, estate planners, income tax professionals, public guardians, fiduciaries, investor group managers, bankers, and individuals, with listing and sale of properties at Orange County, CA
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