The government enacted a law in 2007 that expires in 2010. If your home is foreclosed on the difference between the appraised value (or sales price) the bank establishes when they take possession of the property and the amount owed on the note if considered taxable income. However, the law which was enacted allows homeowners to subtract the amount of the original loan amount plus any refinanced amounts that were used to improve the home from the taxable income. For all those interest only and neg am loans they should consider walking away from the home. This law has a limit of 2 million for married couples and 1 mil. for singles. It also only applies to properties that are a primary residence.
