Unfortunately, many people (especially in southern MI) have been forced to sell their homes at a loss in recent years. Thankfully the housing market is starting to recover. But if you find yourself in a situation where you’ve had to do a short sale, or your home has been foreclosed on, your bank/lending institution could send you what’s known as a 1099 showing cancelled debt. Normally this would be taxable income to you on your tax return. Talk about kicking you when you’re down! However, in recent years, Congress has allowed an income tax exclusion for up to $2 million of forgiven home mortgage debt. They have extended this tax break through 2013. So although you WILL have to report the 1099 on your tax return, it WILL NOT be taxable.