From:  Timothy
Date:  30 Oct 2008
Subject:  Re: Short Sale/Foreclosure

Michael,

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.

Timothy

Answer

Date:  5 Nov 2008

Hello Timothy,

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.

Good luck!
Mike Gray

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