Date: 30 Oct 2008
Subject: Re: Short Sale/Foreclosure
I wanted to compliment you on the excellent article you wrote on short sales that is on your website.
What happens if someone had a house that was their principal residence but was converted to a rental a year or two before a short sale. Do they qualify for relief from debt cancellation for a principal residence?
Thanks for your help.
Date: 5 Nov 2008
The only guidance that we have about this question is the Internal Revenue Code adopting tax relief for cancellation of debt for a principal residence. Section 108(h)(2) says that qualified principal residence indebtedness is acquisition indebtedness qualifying for a tax deduction for principal residence interest as an itemized deduction under Section 163(h)(3)(B).
A rental residence doesn’t qualify for this deduction and therefore a debt cancellation for a rental residence doesn’t appear to qualify for the exclusion.
IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised
that any written tax advice contained on this website was
not written or intended to be used (and cannot be used) by any
taxpayer for the purpose of avoiding penalties that may be
imposed under the U.S. Internal Revenue Code.