DEBT FORGIVENESS
Bankruptcy usually results in forgiveness.
If your mortgage debt is partly or entirely forgiven during tax years 2007 – 2012, you may be able to claim special tax relief and exclude the debt forgiveness income, said the IRS.
Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence. The limit is $1 million for a married person filing a separate return.
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