US law says when a lender decides to forgive any amount of a borrower's debt by accepting less, then the forgiven amount is considered as income for the borrower and is liable to be taxed. but the Mortgage Forgiveness Act removed this tax liability for only the primary residence and is limited to $2 million per year.
The Mortgage Forgiveness Debt Relief Act became law on December 20, 2007, which offered some relief to borrower who owe taxes on forgiven mortgage debt after foreclosure. The act extends such relief for three years, applying to debts discharged in calendar year 2007 through 2009 and was later extended another three years to 2012.
Here are some basic web links for you to view, however please seek advice from an experienced CPA that is very knowledgeable in this real estate tax implication. Like any professional experience and knowledge is extreamly important.
IRS LINK to The Mortagage Forgiveness Debt Relief Act and Debt Cancellation
IRS LINK to Canceled Debts
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