Note the information below is consistent with the information provided by the legal department of the California association of Realtors. Please consider there are at least to concerns. You must consider capital gains and loan forgiveness.
Debt Forgiveness Outside the B Word: "In a true nonrecourse situation, there is no debt forgiveness because the debtor never has any legal obligation to respond personally on the debt. IRC § 61(a)(12) is, therefore, inapplicable. That does not mean, however, that no adverse tax consequences exist as a result of a nonrecourse foreclosure, because they most certainly do. A foreclosure on a nonrecourse debt is treated the same as a sale or exchange of the property securing the nonrecourse debt [Treas.Reg. § 1.1001-2(a)(1)]; a 'sale' also occurs when a debtor voluntarily conveys (e.g., deed in lieu of foreclosure) [Freeland v. CIR, 74 TC 970 (1980)] or abandons [Middleton v. CIR, 77 TC 310 (1981) aff'd per curiam, 693 F2d 124 (CA11 1982)] the property. The amount of the nonrecourse obligation extinguished is treated as the amount realized. A taxpayer computes the amount of the gain (or loss) realized and recognized by comparing the tax basis in the property to the amount of the nonrecourse obligation extinguished at the time the foreclosure sale is completed [Commissioner v. Tufts, 491 US 300 (1983)]. The character of the entire gain (or loss) is determined by the character of the property securing the obligation: if the property is a capital asset, the gain (or loss) is capital [subject, of course, to the recapture rules of IRC §§ 1245 and 1250]; if the"
