This is one of those situations where things are just not fair. The debt forgiveness act was in acted in 2007 when the market just came tumbling down and home values were not worth what they once were. It was intended to ease the burden of someone that just lost their home or just did a short sale so that they can avoid paying the phantom tax. As of now the debt forgiveness act expired Dec. 31, 2013.
So what does that mean? The economy has gotten better but I still see many struggling to hold on to their homes. So lets say someone has to do a short sale or may just out right lose their home. If you owe lets say $300k on your home but have to sell it for $200k because its just not worth what you paid for it since you bought it during the peak. Well that difference, is counted as income. So now you have just made a $100k that you never got. Which for some people can be one very huge tax bill.
The really sad thing about all this is that banks can still write off the losses but the every day person cannot. I know that supreme court as deemed corporations, “a person” so this goes without saying that some people just have privileges that others do not. Unless congress gets it together and reinstates the forgiveness act, the regular person will not be able to write off those losses. It is up for discussion currently with congress and there is a bill to reinstate it, but as of now it is expired.