Hello again Mike,

The Mortgage Forgiveness Relief Act allows taxpayers who go through a foreclosure or short sale to exclude the amount of the cancelled debt as taxable income, but that only applies on foreclosures or short sales of your main residence.

You indicated that this property has been used as a rental since January of 2008. If that is the case it would not qualify to have the forgiven debt excluded from income, regardless of how you used the proceeds of your re-finance. You would have to revert this property back to your main residence before it would qualify for this exclusion.

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Thank you Mike.

Hello Mike,

You are close, but they consider it your primary residence if you have lived there for 2 of the last 5 years preceeding the sale.

If you did not move out of the home until the end of 2007, then you really already satisfy that rule, but you would need to be using the home as your primary residence at the time of the short sale or foreclosure.

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Thank you Mike.

Hello again Mike,

The actual bill which was passed does not establish any length of time you must live there to establish residency. It merely states that the exclusion of debt applies to the principal residence of the taxpayer.

It further definies principal residence as:

`(5) PRINCIPAL RESIDENCE- For purposes of this subsection, the term `principal residence' has the same meaning as when used in section 121.'.

Section 121 is the section which defines your principal residence as being a home you have owned for at least 2 years and which you have lived in as your main home for at least 2 of the last 5 years preceeding a sale.

So with those factors combined, it is just a matter of you moving back in to the home, and at that point you are qualified for this exclusion.

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Thank you Mike.

Hello again Mike,

For the purposes of Section 121, the home does not have to be your current residence. It only defines your principal residence as a home you have owned for at least 2 years and which you have lived in for at least 2 of the last 5 years.

But Section 121 is actually for the purpose of allowing the exclusion on the sale of your primary home, and is not related to the Mortgage Forgiveness Relief Act.

The Mortgage Foregiveness Relief Act does not really directly address this issue. It simply states that the definition of a primary residence will be the same as definied in Section 121.

However, the intent of the Relief Act was clearly only to allow the cancellation of debt on your primary home and not on second homes or rental property. But because it is not clearly defined within that act that you must currently reside in that home as a resident, most tax advisors, including myself, are advising their clients to be on the safe side and re-establish current residency just to be certain your deduction cannot be challenged.

You could certainly try to take advantage of this exclusion without ever actually once again establishing residency, and there is a very good chance you will have no problems with that. I just personally would be on the safe side and move back in if only for a short time, just so there is no question that this was in fact your primary residence.

Putting the utilities in your name and registrations will certainly help to establish that as well.

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Thank you Mike.