My wife and I own a condo in Los Angeles county (CA) valued at around $170,000. We purchased as a primary residence and lived in it for 4 years. We have two mortgages on the property (the second was a home equity line used to renovate the property), both totaling around $318,000.
We moved out of the condo 3 years ago because my family had grown, and no longer fit in the small space. We rent another townhome for ourselves, and rent our condo that we own to tenants.
My question is: If we engage in a short sale, will we be taxed on the difference of what we sell for versus what we originally owe (viewed as income)? Are we protected under the Mortgage Forgiveness Debt Relief Act? If not, are there any options that will cause us to be eligible that are within our control?
1 Answer from Attorneys
My understanding is that the exemption only applies to a principal residence, not a former residence. http://www.irs.gov/Individuals/The-Mortgage-Forgiveness-Debt-Relief-Act-and-Debt-Cancellation
You may want to repost this in a category for taxation to get more attorney response.