Does property have to be a primary residence to qualify for exclusion of cancellation of indebtedness?

August 12, 2011

From:  Paul
Date:  11 Mar 2009

Hello Michael... picked your article up off the internet and it was very helpful to me... I'd like to ask you one question, and hopefully you can help me.

Does the short sale or foreclosure of property have to be of a primary residence at the time of the sale to qualify for the exclusion of cancellation of indebtedness? What if it was originally used as a principal residence but converted to a rental three years later and sold after the conversion?

I am in a bit of a bind and your assistance in answering this would be much appreciated.



Date:  6 Apr 2009

Hello Paul,

Since the property was converted to a rental, it doesn't qualify for the exclusion of income for cancellation of indebtedness for a principal residence. Since the property was rental property, you might be able to offset the loss for the sale against the income from debt cancellation. You also might qualify for the exclusion of cancellation of indebtedness from insolvency.

Good luck!
Mike Gray

We have more answers to frequently asked real estate tax questions! We also offer up-to-date information about new tax real estate tax developments in Michael Gray, CPA's Real Estate Tax Letter.

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