Yes, the foreclosure was as I explained in the first set of exchanges. The short sale for a personal residence was my last answer.
For the short sales of rental property, you can elect to exclude canceled “qualified real property indebtedness” from income.
“Qualified real property indebtedness” is, generally, debt that meets all of the following conditions: (i) it was incurred or assumed in connection with real property used in a trade or business; (ii) it is secured by real property; (iii) it was incurred or assumed after 1992, if the debt is either qualified acquisition indebtedness, defined below, or debt incurred to refinance real property business debt incurred or assumed before 1993, but only to the extent that the amount of such debt does not exceed the amount of debt being refinanced; and (iv) you elect to apply these rules by filing Form 982 with your federal income tax return.
“Qualified acquisition indebtedness” is either (i) debt incurred or assumed to acquire, construct reconstruct, or substantially improve real property that is used in a trade or business and secures the debt, or (ii) debt resulting from the refinancing of qualified acquisition indebtedness, to the extent that the amount of the debt does not exceed the amount of the debt being refinanced.
So, assuming that the debt was qualified acquisition indebtedness, and you are a real estate professional, so the debt is qualified real property indebtedness. You can exclude this from income by reducing the basis of the property by the amount of debt forgiven. You also report this amount on Line 4 of the Form 982.
If the property is subsequently sold (in your case through a short sale), you still report the sale of the property on Form 4797, using the short sale amount as the proceeds and the basis reduced by the amount of debt forgiven (the amount on the Form 982). The short sale then results in a gain or loss.
I hope this answers your issue! If not please feel free to ask away!