I am supposed to sign next week on a short sale. My realtor has told me that I would Probably qualify for the debt discharge form 982 that the lender will be sending in a 1099c for this tax year 2009. I just don't like the probably in that sentence and want to educate myself. How do I know if I qualify and can I write off the interest payments that I did make If I do qualify for forgivness on the taxes?

If you had non-resourse mortgage, then debt cancelled in not your income. In case of resource loan, 1099-C amount is your ordinary income.

You will report sale on schedule D (Form 1040).

The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt of recourse loan on their principal residence. Your U.S. Tax Return: Foreclosure or Repossession of Main Home

I STRONGLY recommend that you get professional tax help when you file your 2009 tax return. The submission of Form 982 mandates that you meet certain, specific criteria to qualify. It is NOT a process for an amateur.