You have two issues when you sale a rental property on a short sale for tax purposes. First, the income from debt relief which is the difference between your loan amount and what you actually pay off. Second, is the gain or loss from the sale and recapture of any depreciation allowed or allowable. The gain or loss is the difference between the sales price and the tax basis, less any commissions and closing costs. If you are not familiar with these calculations hire a CPA or Tax attorney to work it out for you. You may also be facing a deficiency with the lender that you may be responsible to pay back. Consult with an attorney on this one. They will need to review your transaction and your loan documents to determine if you are liable.
Any individual seeking legal advice for their own situation should retain their own legal counsel as this response provides information that is general in nature and not specific to any person's unique situation. Circular 230 Disclaimer - Advice given in this response cannot be used to eliminate penalties with the IRS or any other governmental agency.