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Unless Congress acts to extend the Mortgage Debt Relief Act of 2007, that is correct. Currently this act allows income from the discharge of mortgage debt on a principal residence to be excluded from taxation. This provision is due to expire at the end of 2012. If the act is not extended the amount of debt forgiven through a short sale or loan modification on a primary residence may once again be taxed as income.
Here is a link to an article on the IRS website that explains provisions of the Mortgage Debt Relief Act of 2007:
The Mortgage Forgiveness Debt Relief Act and Debt Cancellation
Also Publication 4681 gives more detailed information on the tax implications of debt forgiveness:
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I’ve heard that in 2013 if you short sale or foreclose on your primary residence, you will no longer be relieved of your mortgage or tax implication on the difference of what you owed and what the bank sells your house for.
I cannot find anything concrete to confirm this. Does anyone know?
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