If the property is a personal residence and sells for more than the mortgage amount, but less than a gain of $250k for a single filer ($500k for a married filer), then there are no tax implications- assuming certain rules under the IRC are met.

If the personal property sells for less than the outstanding mortgage amount plus interest, costs, and fees, then it depends on what the lender does. If the lender gets a deficiency judgement and goes after the borrower for the rest, then again, there should be no tax implications- yet. If the lender writes off the deficiency, this write off is taxable income to someone. If the primary borrower does not pay it, then it is possible that the IRS could come after you (this is the one part of my answer about which I am not 100% certain).

If the property is classified as business or trade property, then there WILL be a taxable gain or loss on the property that someone has to claim. Again, the IRS will make sure that someone pays.

Form 1099-C. If a federal agency, financial institution, credit union, finance company, or credit card company cancels or forgives your debt of $600 or more, you will receive a Form 1099-C, Cancellation of Debt. The amount of debt canceled is shown in box 2.

However, income from cancellation of debt is not taxed if any of the following conditions apply:

The cancellation is intended as a gift.

The debt is qualified farm debt (see chapter 4 of Publication 225, Farmer’s Tax Guide).

The debt is qualified real property business debt (see chapter 5 of Publication 334, Tax Guide for Small Business).

You are insolvent or bankrupt (see Publication 908).

Now, I think you would be better off selling the house, and talk to your lender about a “short sale”–where they will take a lesser amount due them, from a qualified buyer–because they really don’t want to be in the business of selling homes either. Good luck…