In 2007, congress enacted the Mortgage ForgivenessÂ Debt Relief Act of 2007,
a provision that allows you to exclude up to $2 million of debt forgiveness income
from a short sale or foreclosure. The debt cancelled must be related to your Principal
residence to qualify for the relief, and up to $2 million of forgiven debt is excluded if
you are single or married, $1 million if married filing separate. This provision applies to
debt forgiven through December 31, 2012.
If you are underwater you have until the end of this yearÂ 2012 to to sell
your home and qualify for this tax relief.