You'll owe taxes on any gain from the sale just as if you had sold it yourself. The home was sold to cover the debt that was owed on it but that may not reflect your actual gain or loss from the sale.
You will enter the sale just as if you sold a residence. You will input the total amount that the property was sold for and enter the total amount that you paid for the property OR (if you were not personally liable for the debt) you will use the balance due on the mortgage as the amount paid for the home. Any gain from the sale is taxable. Any loss is deductible.
You should receive a tax form related to the sale.
Here is an excellent article from TurboTax on foreclosures and short sales.
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