The short sale is only short if the lender(s) approves the sale. Generally that means you need to prove hardship.
Just because you are going to end up selling at a loss makes no difference. If you are on title on your new house (I am assuming that you and your wife bought a new home), know that the lender of your first home is going to ask for a COMPLETE financial accounting of assets and that new home is going to come up.
Also, know that if you are expecting the lender to take a loss, IF you can prove hardship (meaning you are insolvent and cannot pay your bills), then they are still going to ask you to "participate" in the shortage and will be looking at ALL your assets.
If you opt to submit incomplete financial paperwork that would probably be considered fraud.
Just because your first home's value has dropped, and then you buy another home, don't think that the lenders are unfamiliar with every method to avoid taking a loss.
You should talk with an attorney and your CPA before going too much further.
We get posts like yours frequently. You should also know that loan fraud is now being pursued by the FBI, including "strategic defaults", where someone, with assets and means, lets second homes go into foreclosure. A 1099 may be the least of your problems.
I am very familiar with your area as I am an active agent in La Pine - not sure which property you are talking about but would be happy to take a look at things.
Your situation is a little different than the average person - and there are a lot more questions to figure out what is best for you - I am working all weekend and would be happy to help you out - give me a call or drop me an email -
Please see my blog for helpful info and tips on completing a short sale