This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the homeâ€™s value or the taxpayerâ€™s financial condition.
The amount forgiven must still be reported on Form 982 when filing IRS income taxes.
See this link to the IRS for details: http://www.irs.gov/individuals/article/0,,id=179414,00.html
You need to get the facts. There are too many variables here.
Talk with a CPA about the specifics of the property and the loan. No one should be offering tax advice on TRULIA. Only a tax professional with full knowledge of the facts.