If I understand you, this was from the start an investment property? So it's a recourse loan. They can come after you for the arrearage, but it should be dischargeable in bankruptcy or in Chapter 13 you could cram down the debt to market value with the balance being treated as unsecured (if you're considering that possibility).
You would pay taxes on $60K in income in the same manner as you pay taxes on the rest of your income - calculate your taxes with the extra $60K to determine your exposure.

