several issues...
if your new job assignment is expected to last more than a year - your tax home changed - and your new home would be considered your main home.
As there is no capital gain - it would be more beneficial to treat your rental property as... rental.
The short sale or foreclosure transaction itself - reportable on 1099-A - http://www.irs.gov/pub/irs-pdf/f1099a.pdf should be treated as disposition of the property at the sale price.
As that is your rental property - your capital loss is fully deductible - however it may be only used to offset another capital gain - if you have net capital loss - you would be able to deduct only $3000 current year - and the rest will be carried over to following years until fully used.
If you negotiate with the creditor and all or part of the debt is forgiven or the debt would be canceled under bankruptcy protection procedure - you are sent the form 1099-C.
California law provides that in case of foreclosure or short sale of the primary home - homeowners may not be held liable for deficiency - that is a luxury of living in California.
However - your credit report will be damaged. See more details and examples in this article - http://www.gibsonlawcaliforniarealestate.com/deficiencies-when-is-a-debt-still-owing-after-foreclosure.html
The amount of debt forgiven is reportable on 1099-C - http://www.irs.gov/pub/irs-pdf/f1099c.pdf - generally is taxable, unless an insolvency exemption apply -- you should file a form 982 - to proof your insolvency - and might exclude all or part of canceled debt from taxable income.
Please see the IRS Publication 908 Bankruptcy Tax Guide - http://www.irs.gov/pub/irs-pdf/p908.pdf - with example of the form 982 on the last page.
Please do not be misled by the bankruptcy guide - you may be insolvent without filing for bankruptcy....
You need to fill a form 982 - to proof your insolvency - that would be sufficient to exclude canceled debt from taxable income.
If insolvency exemption doesn't apply to your situation - there is another option.
As you dispose a rental property and report the sale transaction on the form 4797 - you will have capital loss.
- and you can elect to exclude the cancellation of such debt from taxable income - but should also reduce the basis of your depreciable real property by the amount excluded.
This way - your capital loss will offset income resulted by the cancellation of debt.
Reporting procedure is described in the IRS publication 334 - http://www.irs.gov/pub/irs-pdf/p334.pdf - see page 23.
Please be aware that filing the form 982 to make an election is required and that form should be attached to your federal tax return.
That election should be discussed with your accountant.
Let me know if you need any help.
Tax Preparer
Taxes, Immigration, Labor Relations