Home Equity Loans Arizona

Property in Arizona that I have owned since July of 2006, purchased and occupied for 12 months before moving to the East Coast in July of 2007. I have never been late or missed a payment on my mortgage. I now own a home on the East Coast where I live and have been renting the Arizona home for 3 years. I am $160K upside down in the Arizona Home and come out of pocket $1000+ a month to finish the mortgage, hoa’s, taxes, etc. I currently have the property listed with an agent in an attempt to do a short-sale, but with so many homes on the market it is not getting any offers. My question is, if I am able to complete a short sale will I be responsible for paying taxes on the amount the mortgage company cancels, will I be liable to have the mortgage company come after me for the difference owed since this is a rental property. Please note that the loan is still the original loan from when we lived there, so it’s not a “second property” or a “investment property” loan.
To “the tax lady” –
To make sure I am on the same page and understanding you correctly.
I Purchased for $270,000 07/2006.
I lived in it for 12 months and in 07/2007 converted it to a rental and the FMV at that time was $235,000 (this would be a $35K depreciation that doesn’t count).
From 07/2007 to today my FMV has dropped to approx. $100,000 for a total depreciation while a rental of $135K.
If I am understanding you correctly and I short-sale for $100K, my mortgage company will be taking a loss of $170,000 total and if I minus my $135K depreciation while a rental, this would leave me with $35,000. Are you saying that I would be reporting $35,000 as income on my taxes? I think this is what you are trying to say. Look forward to your feedback and thank you.

P.S. Do you know if the mortgage company can come after me for the difference or do I qualify under the Arizona Anti-Deficency Act?