Beginning in 2008 the housing market in the US took a major hit, and along with it many homeowners started getting in trouble with their mortgages. In additional to losing their homes, many found that they were also getting hit with an ugly tax bill. From a tax perspective, there is no difference between a foreclosure and a short-sale - there is debt forgiveness (i.e., the unpaid mortgage) and that is generally taxable.
Congress stepped in and created a short-term provision in the tax code to provide relief. What many people missed (or try to ignore) is that this provision only applies to "acquisition debt" or the money borrowed to buy, build, or substantially improve your primary residence.
Refinancing that loan does not impact this to the extent of the previous mortgage amount. For example, assume you purchased that new home and borrowed $200,000 at the time. You have made payments on the mortgage and paid it down a small amount. Interest rates drop, and so you decide to refinance your mortgage. At the time you still owe $185,000 on the loan. Your new mortgage is $190,000 with the extra $5,000 used to pay the expense of the refinance (e.g., title fees, appraisal, etc.). Now your mortgage is $190,000, but your acquisition debt is only $185,000.
The key news on this is that the short-term provision that Congress created is due to expire on December 31, 2013. After this date there will no longer be this relief.
There are other issues that can affect the taxability of this debt relief. One of those is whether or not the loan, as taken out, was recourse or non-recourse. (Unfortunately lending institutions rarely use tax terms in their loan documentation so this is not usually clearly stated.) A qualified tax practitioner should be able to explore other options or a combination of options to see if any relief is available through other channels.
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