Tax liability can arise when a commercial property has been refinanced, cash taken out, and then foreclosed upon. The cash out can trigger a gain. On a personal residence the gain has to be considerable to generate any tax liability. The tax is long term capital gains at 15%. On a short sale, debt forgiveness generates taxable income as if someone gave you the cash. This would be taxed at ordinary income rate, I believe. There are tax rules that apply to a personal residence so those would need to be checked. A CPA or tax expert should be consulted with the particular facts.
