Question posed by a reader on a different post:  

 I bought a house in May of 08 and is my primary residence. If I have my house foreclosed or short sale do I still qualify for the mortgage debt relief act (no tax conseqences) for the loss. My house is worth $400K and I paid $529K. Do I have to live there for more than 2 years to qualify for the tax forgiveness? Thanks

My answer:

May of 08 must have been a typo. (I make plenty of them when I am blogging and trying to type quickly.)

The mortgage debt relief act seems to be designed to grant relief for 07, 08, 09 to people with principle residences and acquisition debt.

It is my reading that foreclosure, deed in lieu, and short sales (and perhaps other workouts are covered).  I am sure it will all be litigated in due time. 

I get the question about the 2 years all the time.  I do not think you have to worry about the two years unless the 2 years was specifically mentioned in the law.  I am not reading the debt relief act right now but I do not remember reading anything about a two year waitng period.

The two years might be something to consider if you refinanced (some refis will effect your principle) or you took cash out of the property.   Taking cash out might cause your basis to be reduced and then your personal tax lawyer might explain that you could mitigate the capital gains if you lived in the property two of the last five years and the gain was less than 250/500,000. 

You may want to go here to read more about loan forgiveness and the mortgage debt relief act.