Headache Tax Return, Help!!

[ILLMAS]

A client of mine was building a home to sell, the house was finished and put on the market in 2007, in mid 2008 they decided to move in to stage the house and see if they can sell now that it has furniture. They moved out their primary residence and decided to rehab it. Well since the new home was not going any where they decided to rent thier primary house in late 2008, someone gave a security deposit to start renting in December 2008, however they decided not to rent because the lease was going to be on a month to month basis (client was going to return to home if new construction sold). Now here is where the headache starts:

1. Client took out a construction loan of $795,000, $150,000 of equity from his primary residence and another $150,000 from a rental property, however the contractor swindled $300,000. I asked the client for a copy of the title and he said there isn't one, the $795,000 is now a mortgage loan. My poor client doesen't know what was the true cost of the property because there was a lot of fraud with the contractor, contractor made checks to his family and forged my client signature, the bank investigated but could not do anything because the contractor left the country. This was going to be an investment property, but because of the real estate fall, property might go into foreclosure along with his other two properties. My question is, since in 2008 it was a considered a personal residence, there is no need to capitalize it?, I would just itemize for the mortgage interest and property taxes, the same for his primary residence? In short client had to personal residence in 2008.

2. If things are not bad enough already, client has two other condos, both were unoccupied in 2008, not because he didn't want to rent, but because the area they are in, there are another 500 condo to choose from (new and for rent), he contiuned to pay the mortgage, property taxes and assestment fees, but no rent was coming in, in 2009 he was able to rent one only, would it be wise to report both of them with zero rent, he has proof he tried to rent them, he hired a R/E agent and put ads in the paper. Unfortunetly, he is not a R/E professional, so he would be limited to the 25K, he paid more that in just one condo.

3. Client has a dauther that got married in 2007, however she left the country to study medicine, I filed her 2007 return as married, now in 2008 she is a dependent of her parents because they are the ones paying for her education, and her husband is going to file for divorce in 2009, the daughter meets the test of dependency, my only concern is that she is not officialy divorce yet, and her husband probably filed single for 2008, then she would qualify was a dependent. Parents paid a lot in education, she is older the 24yrs, would the parents be able to claim the education credit?

I am also venting, this probably the worst case I have seen related to taxes.

Thanks,

[grandmabee]

They can't claim daughter. How can the husband file single?