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The newly constructed residence does not qualify to be treated as the taxpayer's primary residence. In order to be considered a primary residence you must satisfy the following 2 rules:
1. You must have owned the home for at least 2 years
2. You must have lived in the home for at least 2 of the last 5 years preceding the sale
A short sale on the newly constructed residence would not qualify for debt relief under the Mortgage Forgiveness Act since the taxpayer never actually lived there. So the taxpayer would be responsible for taxes on any debt forgiven by the lender, regardless of whether or not this was an investment property or simply a second home.
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