With over a million foreclosures in the United States last year, and many of them taking place in Florida, there are a lot of taxpayers who are dealing with issues of how to treat forgiven mortgage debt.

There were hundreds of thousands of homeowners who negotiated loan modifications or short sales or suffered foreclosure last year, so the Internal Revenue Service has come out with some reminders on how to handle canceled mortgage debt on your 2010 tax return.

In typical circumstances, cancelled debt would be treated as regular taxable income. But to help distressed homeowners, Congress created an exemption for forgiven mortgage debt so that victims of foreclosure would not also have to pay higher taxes after losing their homes.

The requirements for exempting forgiven mortgage debt from income are strict, though. Not all forgiven mortgage debt qualifies. The borrowed money had to be used for the home, and not for other reasons. Specifically, the debt your lender canceled must have been used by you "to buy, build or substantially improve your principal residence."

Those are just a few words, but a lot of requirements are loaded into them. The mortgaged house cannot be a second home or a real estate investment, it has to be the principal residence.

Also the money had to be used to acquire, construct or improve that principal residence. The forgiven debt won't qualify if you took out a second mortgage and used the money for a vacation or a car or anything other than the house.

Fort Lauderdale foreclosure attorneys advise people with forgiven mortgage debt to be sure and take advantage of the tax exemption, but to be just as sure they are applying it accurately.

Source: Los Angeles Times "Passing the test on canceled mortgage debt has tax rewards" 3/13/2011