Most sellers who have only owned their properties for a few years will almost certainly incur a loss on that real estate.
Prior to now in situations of cancellation or forgiveness of debt by lenders, the borrower usually had reportable income, though there were some exceptions. Normally the bank would send the borrower a 1099-A. For example, if you owned a home that sold at foreclosure for $100,000.00 but you had owed the bank $200,000.00, the debt cancellation of $100,000.00 would be taxed as ordinary income, the same as your salary.
The Mortgage Debt Forgiveness Relief Act allows a temporary fix for certain residential owner occupied properties until December 21, 2012.