Poway- From what I know there are NO exceptions on what they call a “Short Sale”. Whatever “debt relief” the bank gives you- it is taxable. Also, if you give the keys to the bank in say January with a $50,000.00 debt relief you better make an estimated payment to the IRS in that quarter or you will get late fees tacked on! What happens with the IRS is another matter. They cannot go after certain assets and if you show a zero net worth then they could forgive the debt.