Homeowners who went through foreclosure in 2007 could receive a benefit on their federal income tax return thanks to the Mortgage Forgiveness Debt Relief Act of 2007. Under the new law, taxpayers no longer have to pay tax on the value of their home loan if the loan was cancelled through a foreclosure proceeding, otherwise known as "cancellation of indebtedness income." The indebtedness relief benefit applies only on a primary residence -- not second homes or investment properties -- and is limited to the first $2 million of mortgage indebtedness on foreclosures on or after Jan. 1, 2007 and before Jan. 1, 2010. The sticky point, however, is that refinances made between the time of purchase and foreclosure could muddy the waters. For example, if you refinanced your loan and took cash out of the property to pay for cars, vacations and other real estate, the amount of your loan when it went into foreclosure could have been far greater than the original debt. The rel...
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