Oh great! Potential to be taxed on short sale debt forgiveness

From the East Valley Tribune;

Former homeowners who did a cash-out refinance on their home when values skyrocketed are particularly vulnerable to higher tax liabilities in the aftermath of a short-sale, Underwood said.

“For example, if somebody bought a house for $200,000 and then … when values shot up, they took $100,000 back out so now they owe $300,000, my understanding of the debt-forgiveness act is it’s based on the amount used or the amount borrowed when they purchased the home,” he said. “The original mortgage that they took out was only $200,000 when they bought the house, so they could be liable to pay taxes on that $100,000 as regular income.”