On December 20, 2007 the Mortgage forgiveness Debt Relief Act was signed into law. From January 1, 2007 through December 31, 2009, any forgiven or “canceled’ primary mortgage debt from a principal residence will not be taxable, including debt used to improve the residence. The limit is up to $2,000,000 for married couples filing jointly or $1,000,000 if filing separately.
However 2nd mortgages or home equity lines are not exempted. 2nd homes and investment properties are subject to taxation for forgiven debt. There is an exception when the borrower is insolvent, meaning that the liabilities are greater than their assets. You can visit the IRS website to get a detailed explanation and worksheet to figure it you have any liability.