50% primary residence 50% Non-primary - Short Sale Question

25inirvine

New member
I was just wondering if anyone has come across a scenario like this:

Two brothers bought a place together around 2003.  At this time, they were sharing it (along with other family members) but it was both their primary residence.

Fast forward to 2005, they refinanced the house and took out 100k in cash.  Brother A used his part of the cash to put down on a new house and he moved out.  So the first home is no longer his primary residence.  Brother B just used his cash and the first house is still his primary residence.

Now they can no longer afford the house and are doing a short sale (with each brother having their own different reason).  Total debt is about 475k, the approved short sale is for 325k.  I think the original purchase price was around 330k.

So first question has to do with the bank:  I'm guessing its irrelevant whether it is primary or not since they refinanced and took out cash?  Therefore, it is just whether or not the bank decides to go after the 150k that is short.  Sound right?

Here is my main question:  Assuming the bank forgives the 150k.  How does the IRS treat this?  Do they split it right down the middle with Brother A having a taxable income of 75k since it was not his primary and brother B having his 75k forgiven since it was his primary?

Or can they argue it was still owner occupied and therefore all 150k in taxable income is forgiven?

On top of that...is there also capital gains?






 
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