If you have a short sale or a foreclosure and have cancelled debt, tax law treats that as income. However, Congress passed laws excluding most such debt from a short sale or foreclosure related to your principal residence from federal tax. Congress extended that law for 2013.
California had a similar such law (through 2012). However, the California legislature did not pass such legislation for 2013. Thus, an individual in California who has a short sale or foreclosure related to his principal residence will have cancelled debt income in 2013. The income can still be excluded by using either the insolvency or bankruptcy exceptions.
