The Internal Revenue Service considers forgiven debt as ordinary income. This would include the deficiency resulting from a foreclosure, short sale, or loan modification. However, in 2007 the Mortgage Debt Relief Act was enacted and qualified homeowners whose mortgages were reduced or written off as a result of loan modifications, foreclosures or short sales were exempt from taxation. This relief only applied to primary residences. However, this Act was due to expire on December 31st of 2013, but was extended at the end of last year. The extension passed by a large margin in both Houses and President Obama signed into law.
The extension only applies to short sales conducted in 2014. Any further extension of the short sale tax break would need to be taken into consideration by the present members of Congress.