Your accountant is correct if you are referring to your primary residence, and assuming you meet all of the other criteria under the federal Mortgage Debt Forgiveness Tax Relief Act of 2007 (applicable till the end of 2012). Under this federal law, you might not need to pay any income tax on canceled debt (which is the unpaid loan balance that is forgiven by lender) resulting from a foreclosure, short sale or deed in lieu of foreclosure if you as the borrower satisfy certain conditions for mortgage tax relief (e.g., principal residence, owned for at least 2 years, debt amount of $2 million or less). Your bank will be giving you a form 1099-A or 1099-C.
For more information on debt foregiveness, 1099-A, and 1099-C, see:
I believe your realtor was referring to recent California law regarding anti-deficiencies (not income taxes). See:
I agree with my colleague's answer, and expect that your debt will be forgiven, regardless of the lender's 1099 reflecting "income," as long as this was your principal residence. lawYour accountant is most familiar with this debt forgiveness law and your mortgage situation, and they'd be the one defending your tax return, so they're the one to trust.
Disclaimer: Please note that this answer does not constitute legal advice, and should not be relied on, since each state has different laws, each situation is fact specific, and it is impossible to evaluate a legal problem without a comprehensive consultation and review of all the facts and documents at issue. This answer does not create an attorney-client relationship.