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Good evening. Under Section 121, if you used this house as your principal residence for an aggregate of 2 years out of the preceding 5 years, it qualifies as your principal residence. You won't report the sale on Form 4797. Rather, you'll report the short sale transaction
on Schedule D and Form 8949. Then, with regard to the forgiveness of debt evidence by the Form 1099-C, normally, debt forgiveness results in taxable income
. But under the Mortgage Forgiveness Debt Relief Act of 2007, taxpayers may exclude debt forgiven on their principal residence if the balance of their loan was $2 million or less. The limit is $1 million for a married person filing a separate return. To exclude the 1099-C amount you will complete Form 982 and attach it to your Form 1040. The law
has now been extended through the end of December 2013. As clearly outlined by the Mortgage Forgiveness Debt Relief Act, the IRS defines principal residence according to Section 121 of the IRS code, which states that it had to have been the person's principal residence for 2 of the past 5 years before the date of the sale (or foreclosure with regards XXXXX XXXXX Mortgage Debt Relief).
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