Pres Bush signed into effect H.R. 3648, the “Mortgage Forgiveness Debt Relief Act of 2007”
http://www.whitehouse.gov/news/releases/2007/12/20071220-6.html
This law would eliminate a taxable gain on borrowers who received a forgiveness of debt from a lender in a short sale. Normally, if a lender forgives the debt, to this extent the homeowner would have a taxable gain. HR 3648 would eliminate this “phantom income” on a borrower’s principal residence. The law applies to all ACQUISITION (not refi) debt forgiven from Jan 1, 2007 and on.
 This is an EXTREMELY SMART move on the part of the government, FOR ONCE! To make up some of this income, the law also amends the capital gains rules principle residences by denying an exclusion of the gain that is allocable to a nonqualified use of such residence (i.e., use other than as a principal residence).
