I have a seller who was living in his house up until the time that he moved in with his girlfriend.  He was renting his house out until the tenants stopped paying we are going to short sale the property.  As for the 1099 will the property be considered investment?

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As far as MDRA tax forgiveness, yes. You can google it and read the exact language

They need to get this info from their tax professional as there are several qualifiers to determine what is investment property and what's not.

Thanks for the replys and link.  There are some accountants believe it or not that have no idea. 

Here is what the IRS says about an investment property in Publication 550: "This is property that produces investment income. Examples include stocks, bonds, and Treasury bills and notes. Property used in a trade or business is not investment property."

You will need to pay income tax on the rental income.  Publication 523 discusses what does and does not qualify as your main home. If you have lived in the property for more time than you didn't it very well may qualify as a sale of your main home and thus may exempt you from paying on any gains.

Even if the property was purchased as an investment property from the start, if the seller could prove "insolvency" then he would not be paying income tax.  I had a seller that had 3 duplexes that sold as short sales and did not have to pay income tax on the deficiency.  Your seller needs to speak to a CPA/tax accountant that knows what they are doing. Keep looking for one!

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