On top of that you can expense the labor cost from profit to reduce taxable income.

I know its not taxable income I just looking to clanup my P&L.

Thats a federal agency you're dealing with.If you do it on one, you might be able to at least argue that your intent was to move in.

NEW YORK (CNNMoney) -- Flippers, the real estate investors who buy homes on the cheap and quickly resell them at a profit, just got a reprieve from the Federal Housing Administration.In an effort to help stabilize housing prices and unload some of the foreclosures that are flooding low-income communities, the mortgage insurer extended a waiver of its anti-flipping regulations through 2012.The waiver, which was initially issued in 2010 and set to expire this month, suspends regulations that prohibit the agency from insuring mortgages used to purchase homes that are bought and resold in less than 90 days."

They will be now be charged according to their tax bracket federal taxes on the amount that the bank forgives.

Directly from Fannie Mae's (Federal National Mortgage Association) latest Form 10-Q is this: "Neighborhood stabilization is a core principle in our approach to managing our REO inventory.

At best as noted above they are not that effective, sounds like at the federal level and consequently state level ambiguous and vague, “unknown”.

Third, they mentioned federal legislation that requires banks to have cash on hand of 7-10 times the amount of bad loans they hold or risk being shut down.

Since the lien is still in place, I would think that this is not a taxable event to this man.

Interest would be reported on line 8a of your Federal 1040.