The Mortgage Forgiveness Tax Questions

[Joel Fraser]

We're considering foreclosure as an option for our house in California. It was financed with an 80/20 loan arrangement, zero down, interest only. The smaller HELOC loan was taken at the same time as the bigger loan, and 100% of the proceeds went into purchase of the house. We've lived in the house as our primary residence for 2 1/2 years. My understanding from the IRS website is that the Debt Relief Act shields borrowers from taxes on income incurred through debt cancellation. However, the IRS also states that foreclosure on a house secured by non-recourse loans results in no income. Am I right in thinking that if I move forward with foreclosure, I don't need to have it complete by the end of 2009 to take advantage of the act? It seems like the act is irrelevant for our situation. Thanks!