http://experts.about.com/q/Tax-Law-Questions-932/Short-Sale-Home.htm
Interesting link about an accountants explaination on how to get some of the 1099 taxed income reduced.
Chase
If the homeowner had PMI, does that affect the deficiency and thus the debt forgiveness? For example, if the SS resulted in $X deficiency and the bank was reimbursed by the PMI, does the homeowner still receive a 1099 for $X?
Also, if you consider a normal sale in which the homeowner profits from the sale, if it was the homeowner’s primary residence 2 of the last 5 years, the profits are not taxed as income. Does the same hold true for debt relief from a short sale?
I believe this is the IRS form and instructions on this topic