First let me say that a short sale is not a 'right' and your lender will need to agree to do it. With regards to property taxes, they will need to be settled in the transaction so the buyer gets title free and clear. In addtion to property taxes you will receive a 1099 for the amount of forgiven debt. You may or may not owe income taxes on this amount. Finally when the rental property is disposed of there will be a gain or loss on the sale. You should get professional tax advice on what your tax liability will be before deciding how to proceed.