Legal Question in Real Estate Law in California

I'm Short Selling my house in California that I lived in until 2 years ago because we are upside down on the house and on our monthly bills carrying the house currently. Without that house, we are just about breaking even. Do we qualify for debt forgiveness from the IRS? Is the insolvent calculation taken at the time we start the short sale or will the IRS look at our finances after we've sold the house or let it go to foreclosure? We lived in the house from 9/2001 to 6/2009 and rented it until 9/2010. We stopped making payments 10/2010 and got the short sale offer on 12/2010 which hasn't yet been approved.
To clarify the question is about the IRS coming after us for the tax on the amount forgiven - when do they look at our finances to determine if we are considered insolvent? Before or after the debt is forgiven? Any additional insight you can give me about this issue is greatly appreciated.

Asked on 4/05/11, 9:43 am

Bryan Whipple Bryan R. R. Whipple, Attorney at Law

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Your best source of information is the IRS itself. Try this link:

http://www.irs.gov/individuals/article/0,,id=179414,00.html

If that's not sufficient, give them a call.

Answered on 4/05/11, 10:20 am

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