Few things can rock your and your family’s world like the possibility of losing your home to foreclosure. If you’re facing foreclosure, you probably feel as though things couldn’t get much worse.

But thanks to our tax law, they could. The law treats foreclosure as if you sold your home—and you can’t deduct losses on the sale of your personal home. Worse, if the lender sells your home for less than the amount of your mortgage, the lender sends you a 1099-C for cancellation of debt income, which can result in more taxes.

Let’s say you take out a $237,500 mortgage to buy a $250,000 home. Three years later, when the fair market value of the home has dropped to $190,000, you walk away. The mortgage company forecloses, sells the home for $190,000, and releases you from the $231,500 remaining mortgage debt.

Here’s where the tax law takes its bite. First, it doesn’t let you deduct your $60,000 loss on the home ($250,000 - $190,000). Second, you now have $41,500 in taxable cancellation of debt (COD) income ($231,500 less $190,000).

And you could end up with COD income even if you manage to save the home by restructuring your loan. When a lender reduces the face amount of your mortgage, you have COD income equal to the difference between the original face value and the new mortgage amount.

But here’s some great tax-busting news for which you can thank your lawmakers: if you incur principal residence COD income before the end of 2016, you can use this special tax-law break to exclude all or part of the COD income from your taxable income. ... Log in to view full article.