Remember you have to be concerned about Capital Gains and the California Franchise Tax board as well.
Mortgage Debt forgiveness - Loan forgiveness - 1009 c: "Normally, debt forgiveness results in taxable income. But under the Mortgage Forgiveness Debt Relief Act of 2007, enacted Dec. 20, taxpayers may exclude debt forgiven on their principal residence if the balance of their loan was less than $2 million. The limit is $1 million for a married person filing a separate return. Details are on Form 982 and its instructions, available now on IRS.gov.
'The new law contains important provisions for struggling homeowners,' said Acting IRS Commissioner Linda Stiff. 'We urge people with mortgage problems to take full advantage of the valuable tax relief available.'"