Congress has extended the tax exclusion for forgiven mortgage debt through 2012. There is a $2 million limit ($1 million for married individuals filing separately) on this tax exclusion, and the loan must have been used to buy or improve your principal residence. Under previous law, forgiven debt would be considered taxable income by the IRS. While you may qualify for this immediate tax exclusion, you may have to pay more tax once you sell your home. The nontaxable portion, or cost basis, of your home will be reduced by the excluded amount, possibly resulting in more gain on the eventual resale.