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Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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My question is for a tax expert. The question has to do with

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My question is for a tax expert. The question has to do with the Mortgage Relief Act and the exclusion of cancellation of debt from income for qualified personal residence indebtedness. A taxpayer had a residence in one state and started construction on a new residence while living in the old residence. The taxpayer was then transferred by her company to another state and lived there 2 1/2 years before selling the first residence. A few months later the taxpayer wants to sort sell the constructed residence where she never lived or rented out. Does this constructed residence where she never lived but intended to qualify for the exclusion of debt for qualifed personal residence indebted even though she never lived there and sells it within a few months of selling the other residence? In the new state she lives with her parents. If not, should she treat it as investment property?
Submitted: 7 years ago.
Category: Tax
Expert:  Merlo replied 7 years ago.



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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