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>>can I component depr the improvements/repairs to the building?<< Theoretically maybe, but it isn't easy and it isn't cheap. Cost segregation requires an engineering study.

>>because of no payments, interest and RE taxes<< Unfortunately I don't have access to my regular computer, so I can only suggest what to look for in your own research. There is some example or other clarification in the regs or a pub, explaining that interest and taxes accrued later are not eligible for the debt exclusion because they are not part of the original acquisition debt. Section 121 plainly says one must use the house as a principal residence for 2 out of 5 years. That is NOT saying the 2 years defines principal residence, which only means where one spends the most time during any tax year (generally, at least six months). The one month thing sounds to me like a deliberate, self-serving misunderstanding. I would guess it's loosely based on a minor point of a specific court decision or Private Letter Ruling, with little or no relevance to your client's facts. Ask for a citation.

You need to follow the interest tracing rules for this. Set up a spreadsheet to trace how the proceeds were used, to allocate the interest allocable to each, and to properly account for the repayments. The tracing rules also have a specific order in which the principal repayment of the debt is applied. The $280K is in the investment interest category. If you are unsure, check out Pub 535 under the section "Allocation of Interest" and also at the bottom of that section for "Loan Repayment" for the ordering of principal application.

This is a topic that's been debated quite a bit here over the yeas. This ruling might clear up some of the confusion, even tho it only directly applies to Non-Resident Aliens. U.S. Court of Appeals overturned the Tax Court, which had agreed with the IRS position. http://www.accountingtoday.com/news/South-Korean-Gambler-Wins-Appeal-Slot-Machine-Tax-Ruling-67378-1.html?ET=webcpa:e7374:61496a:&st=email A South Korean businessman who lost thousands of dollars in a California casino shouldn’t be taxed for each winning pull of a slot-machine lever, a U.S. appeals court found. Sang J. Park, who visited the casino while on vacation, can calculate taxes based on the outcome of sessions of gambling rather than on individual bets, the U.S. Court of Appeals in Washington said Tuesday, ruling against the U.S. Internal Revenue Service and reversing a Tax Court decision. The IRS lets U.S. citizens calculate their taxes based on net winnings over the course of a gambling session. The appeals court said the same reasoning could apply to nonresident foreign gamblers. While Park made $431,658 in 2006 and $103,874 in 2007 in winning slot-machine jackpots, over the full course of his excursions he was a net loser of $4,663 in one year and $45,130 in the other, according to the filing. Foreign gamblers in the U.S. are subject to a 30 percent tax on slot-machine winnings of $1,200 or more, according to court filings. The IRS argued that the tax code doesn’t allow foreign gamblers to deduct losses from winnings. The appeals court called that argument “a non sequitur.” “The fact that non-resident aliens may not deduct gambling losses from gambling winnings does not tell us how to measure those losses and winnings in the first place,” the court said. Typically, U.S. casinos withhold 30 percent of slot jackpots from foreign nationals and won’t let them attempt to recover that money if they wind up net losers, McDevitt said. The casino Park attended failed to withhold from him, sparking a tax bill from the IRS, he said. “We were actually afforded an opportunity to challenge the law, which usually doesn’t come up,” McDevitt said. “Now, the foreigners will be allowed to file amended tax returns and claim refunds of the tax they’ve already paid.” Grant Williams, a spokesman for the IRS, declined to comment on the decision.

I have had to educate several clients on the fact that the repossession of a business property is treated like a sale. The gain cannot be avoided. Sometimes the lending institution will issue a 1099A showing the fulfillment of the note due to repossession. The 1099A is not forgiveness of the debt. After the bank sells the property, the taxpayer may still be liable amount that the bank writes off. The 1099C shows debt forgiveness and there are possible exclusion rules that may prevent him from claiming it as income. Most have refinanced a few times and taken out a bunch of cash. Property ends up selling for far less than the mortgage. I get the question: "How am I supposed to pay that?" I have a reply: "What did you do with the cash you took out when you refinanced?"

The forgiveness of the debt will probably cause him a large capital gain. This has nothing to do with the 1099C. You need to sharpen up on the differences. The debt forgiveness is treated a sale for the amount of the forgiven debt. Depreciation recapture must also be calculated. This amount is NOT reduced. If he receives a 1099C, there are exclusion rules for the amount of debt not being taxed as income. This is a totally separate calculation and does not reduce the amount of gain on the sale.

Are you talking about the Mortgage Relief Debt Forgiveness Act? If so, I believe it uses the Section 121 definition of Principal Residence, which would be 2 out of the last 5 years. Instructions for form 982 say Principal Residence Indebtedness. Maybe I'm not following what you're asking, because I'm not sure what the 12 months (as opposed to 1 month) would refer to.