Mortgage debt forgiveness was part of the “Fiscal Cliff” bill that passed Congress on January 1st. If you sell your primary residence in a short sale (or your home is foreclosed), the cancelled debt (up to $400,000) is generally not subject to federal taxation. California had a similar provision (but only up to $250,000); however, that provision expired on December 31, 2012.
Lawmakers in California are considering extending the legislation into 2013. The measure has bipartisan support, so it’s likely this (or something similar) will be signed into law. I would expect, though, that the dollar limit for the California measure would be less than the federal measure.