I don’t believe you are correct. First of all he didn’t sell it so he can’t claim the sales price as a loss since he was not part of the transaction. Second, what I’m talking about is if you owe the bank $200K and they sell the house in a short sale for $125k for example then the $75k difference can be considered income since you actually owed that money and so it is treated as ordinary income. It’s like winning a house or a car in a raffle. You have to claim the value as income.
I think Congress passed a law that mortgage deficiecies will not be counted as income.
If the bank “forgives” the $75k, then it could be income. I bet the bank tries to collect it.