Foreclosure and Your Tax Bill

You may qualify for tax relief. Here's how to get it.

If you were among the millions of homeowners caught in the mortgage foreclosure fiasco or who if you have had your debt reduced through a mortgage restructuring, you may qualify for special tax relief when you file your 2008 tax return.

Normally, if a commercial lender cancels a portion of your mortgage debt through a transaction known as a "short sale" or your debt is wiped out in a foreclosure, the forgiven debt is considered taxable income. Congress approved legislation in 2007 that excludes up to $2 million of indebtedness if it is secured by a principal residence. Last year, lawmakers extended the homeowners' relief through 2012.

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Mary Beth Franklin
Former Senior Editor, Kiplinger's Personal Finance