SECTION 1. Paragraph (a) of part B of section 3 of chapter 62 of the General Laws, as appearing in the 2012 official edition, is hereby amended by adding the following subparagraph:-

(17) Income attributable to the discharge of debt on a principal residence, including debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, shall qualify for tax relief subject to the following conditions and limitations.

(a) No more than $1,000,000 of forgiven debt is eligible for this exclusion, except if married filing jointly, up to $2,000,000 may be excluded.

(b) Tax relief shall only apply to “acquisition indebtedness” as defined in section 163 (h) (3) (B) of the Code.

(c) “Principal residence” shall have the same meaning as section 121 of the code.

(d) Tax relief shall not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.

SECTION 2. This Act shall apply to discharges of indebtedness on or after January 1, 2013.

SECTION 3. The commissioner of the department of revenue shall promulgate regulations to effectuate this provision.