In 2006, my ex-wife was awarded the house and its encumbrances and I was held harmless. We are both on title, but only I am on the loan. If we enter into a short sale agreement and the bank issues a 1099 C, will the IRS recognize if my ex-wife claims the discharged debt as income since she was at least on title since the house was purchased together during the marriage (she claimed the interest write off under the same guise)?

If you are both on the title, the Form 1099-C will be issued in BOTH or oyur names.

The one whose SSN is on the 1099-C is the one who the IRS expects to claim the income on her tax return.

Just make sure the 1099-C is issued in her name with her SSN and oyu should have no problem.