Traditionally Foreclosures and Short Sales are taxable due to debt forgiveness but with the enactment of the Mortgage Forgiveness Debt Relief Act of 2007 homeowners / borrowers can avoid the tax liability if the short sale property is their primary residence.  In 2010 California also aligned the state tax code with the federal tax code.  Some of these codes may phase out in 2012 if not re-enacted by congress.  Because of the complication of the tax code it is always recommended that you consult with a knowledgeable accountant on your individual situation. 



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