Talk to your attorney. A short sale might be the right thing to do, morally, however, it is entirely up to you whether you want to go through the trouble considering the bank can no longer come after you for a deficiency judgment. As for taxes, I assume you are discussing income taxes. Again, that depends, verify with your attorney and your tax preparer, but if it was your primary residence, probably not. It should be covered by the Mortgage Debt Forgiveness Act. Your attorney and tax preparer will know for certain.