I have been getting a lot of questions lately about the ramifications of short sales and how it impacts income taxes.

Congress passed and the President signed the Mortgage Forgiveness Debt relief act.  
    
    Let me just say here I am not a lawyer or a cpa nor do I work for the government so all of this information is just my opinion. 

The act can be viewed here.  I think it is a great benefit to people who have to do a short sale.  The reasons for doing a short sale are many but the fear of doing one because of the tax consequences should be removed. 
If you need more information on short sales look here or here. 

The act was much needed legislation and should not be looked upon as benefiting people just because they could not make their payments.  The act removed the "phantom" income that was generated by a short sale.  It does not encourage or discourage short sales it only fixes a problem that was not seen until the recent slow down in the real estate market. 

By the way the foreclosure laws in Colorado did finally change.  They were slated for change on July 1 of last year but that was pushed back until Jan 1, 2008.  The new law is now in effect.  We probably won't see any fallout until closer to mid March because of the new redemption/cure period.  Any questions about the changes to foreclosures let me know.