Will amount of debt cancelled on 1099c form effect by tax return? How does thi work? I sold home short sell.

Income reported on 1099-C must be reported on your taxes. However, if this loan foirgiveness was because your principal home was foreclosed on, you may qualify for a credit that makes this "income" tax free. See: Home Foreclosure and Debt Cancellation (http://www.irs.gov/newsroom/article/0,,id=174034,00.html) and form 982: http://www.irs.gov/pub/irs-pdf/f982.pdf