Your friend should speak with a real estate attorney and tax advisor to help him make the best decision for himself and his family. The real estate attorney could lay out the legal issues and also possibly try to negotiate with the bank for him; the tax person could explain the tax implications for a short sale vs foreclosure. I believe that the a bill was passed in 2007 that was related to foreclosures which erased the debt forgiveness tax to those who did a short sale if the property was their primary residence, but being that his CA home is now a rental, I would guess he would have to pay debt forgiveness tax. If his loan(s) were nonrecourse because he originally bought it as his primary residence and didn’t refi, he shouldn’t have any tax issues.

I’m sorry your friend is going through this, it really sucks to be in his situation.