Before a taxpyear recognizes cancellation of debt income be aware that there are two exceptions to reporting such income as follows:
A. INSOLVENCY: If you are insolvent after the discharge you have no taxable income.
B. QUALIFIED PRINCIPAL RESIDENCE INDEBTEDNESS (QPRI): There is a second exclusion called qualified principal residence indebtedness (QPRI) for discharges before 1/1/13 which allows for up to a $2 million dollar exclusion.
To meet the QPRI you must meet 3 parts:
(1) the debt was used to acquire, construct or substantially improve a residence, and
(2) the debt is secured by that residence and
(3) the residence is used by the borrower as his or her principal place of abode fro two out of the five recent years.
You should sit down with a good tax attorney or tax accountant to go over these exclusions.