In a loan modification, short sale, foreclosure or deed in lieu of foreclosure, the owner can receive “capital gain or loss” as in any other sale of real property.  The owner will be subject to capital gains taxation on the “forgiveness of debt” or “cancellation of debt” but can also receive a credit for a capital loss (only on investment properties).

Taxable ordinary income is triggered by the lender’s forgiveness of debt of $600 or more.  The lender is required to issue a 1099-C (“c” for cancelled debt) but it is the individual’s responsibility to recognize a capital gain.  

Please consult with a CPA because each situation is going to be different.