Can a refinanced mortgage be forgiven and non taxed if insolvent?

We relocated a couple of years ago and could not sell our home after we relocated. We still have that home and can not sell it for the mortgage amount we owe on it.

We have been able to rent it but at a huge monthly loss, and we now have come to our end with nothing left in any bank account… no savings, no 401-K left, only one poor vehicle, and most of our possessions have been sold off to keep afloat over the two years. Our Realtor has suggested a short sale and is speaking with our mortgage company about this.

My question is this: Can the forgiven amount in a short sale still be non taxed even if the mortgage on that home had been refinanced at an earlier time? I read that a loan forgiveness on a mortgage that has been refinanced might possibly be handled differently than a mortgage forgiveness on a mortgage that has been refinanced. The house that we are looking at for a short sale is located in Virginia and we did refinance earlier on.

Can anyone help with info?

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