This makes me mad. When speaking to clients regarding Short Sales the majority do not understand the tax consequences of a Short Sale. Alot of that confusion comes from the fact that the Federal Gov't is not currently requiring a tax, but depending on the state you live in the homeowner may still be liable for the loss as is the current rule for California homes.
Below is a great article that spells out the difference between the Federal and State requirement.
Lost Money On Your House, Short Salers Face Huge Tax Bill
Please ensure if you are considering a short sale the tax issues and I highly recommend you speak with a Tax Accountant regarding this liability.