When it comes to the relief of debt, you will need to make a swift decision on what course of action you will pursue.  One one hand, you might want to hold on to your property for sentimental value.  On the other hand, you might want to look at the decision with your property as a business decision.  HERE ARE THE FACTS:

Up until December 31, 2012, taxpayers that qualify under the guidelines of the Mortgage Forgiveness Debt Relief Act and Debt Cancellation can discharge the amount of forgiven debt as taxable income.

You can view the qualification through the IRS website here:

http://www.irs.gov/individuals/article/0,,id=179414,00.html

Summarizing the site:  If you complete a short sale or your property is foreclosed on, you will not have to claim the difference in the amount of settlement as taxable income.

However, if you complete either of the above AFTER this expires in 2012, you WILL be held responsible for the difference as taxable income.  Here is an example:

If you owe $300,000 on your property, and your property sells for $200,000, at a 35% tax rate, the settlement difference of $100,000 @ 35% is $35,000.  This is going to be the same whether it is completed through short sale OR foreclosure.

If this is completed before the expiration date, you will not have to claim that $100,000 as taxable income.  If this is completed AFTER the expiration date, you are on the hook for $35,000 in taxes.

If your property is worth significantly more that this, you are responsible for even more in taxes.  The idea would be to act now while you have the chance.  Foreclosure and short sale proceedings can take up to a year.  The longer you wait to make a business decision, the worse off you are.