If homeowner's insolvent

 If a homeowner can show he's insolvent before the discharge of the mortgage and turnover of the property, as well as afterward, any proceeds are not taxed. However, Trenholm says, "insolvency is a little tricky. There's no strict definition of what assets [go in the calculation], but for the most part, a lot of people caught in the real-estate crunch can establish that condition."

The other option is bankruptcy.

"Forgiveness debts, in these cases, are not taxed," Roth says. "They don't want the bank chasing them down, which is why many times people going through foreclosure also go through bankruptcy."

However, filing for bankruptcy has its own set of considerations. "New bankruptcy rules don't give [filers] a lot of relief," says William Bost, a member of the Raleigh, N.C.-based law firm Ragsdale Liggett. "If you have a job and are making money, the new bankruptcy rules don't give you a whole lot of help. It gives you some time, but I don't think that's necessarily the way to go.

"It used to be like going to church: You walk in and walk out absolved. But it's not like that anymore," Bost says. "Now, it's not worth the pain you pay the rest of your life."

One thing lending and tax experts all agree on: If you're facing foreclosure, take action as soon as you realize you're in trouble. And get professional help to determine exactly what your personal tax labiality might be in the transaction.

Lanzaro has two other recommendations: "The best advice is, don't buy a house you can't afford, and don't get an adjustable-rate mortgage."

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