Short Sale, Primary Residence with Rental

[Howco]

Taxpayer owned and lived in home for 4 years. The property had detached garage with rented apartment above. Taxpayer filed Sch E, claimed rental income, expenses, depreciation.

Property sold for large loss. Short sale. No 1099S, no 1099C.

Does the sale of the house have to be allocated in two - part sale of primary residence and part sale or rental unit? Can the (allocated) loss on the sale of the rental unit be deducted? Does the cancelled mortgage debt need to be included in income? Only the part of COD income allocated to the rental unit?

[taxmom34]

when selling personal residence with rental units, taxpayer is selling his residence and selling a business. the business portion would be a 4797, software will show the loss but also show depreciation as ordinary income on form 1040.