To the best of my knowledge, the rule for forgiveness of debt for personal residences apply. Kindly refer http://www.irs.gov/newsroom/article/0,,id=174034,00.html
I hope this helps...
Sorry, but I would expect a little more from you rather than sending me to a web site.
How is the short sale refected on the return?
Is the non recourcse cancellation from debt deducted from the cost basis?
Does the primary residence rule exclusion apply?
Although you do not realize gain or loss on a short sale until you close the sale, you should still report any short sales you enter into in 2010 on Schedule D (Form 1040) if you received a Form 1099-B regarding that short sale. See the Instructions for Schedule D for more information.
In the case of a distressed property disposition with a non-recourse loan, the disposition is taxed as if it were sold for the greater of the outstanding debt or the sales price. The nature of the gain and the deductibility of any loss depend on the holding period and the nature of the property as with any other disposition. The following examples are simplified. Adjusted tax basis for calculating gains and losses can be affected by more than just purchase price and depreciation; and the deemed sales price in a disposition by a deed in lieu of foreclosure includes past due interest, but may be offset by a deduction for that interest. The primary residence rule should may apply.