[oregonheaven]

AZ - If you read the IRS discussion on the MFDRA (it's not very detailed), I believe it's Publication 4681, it's very clear that a principal residence under the term "qualified principle residence indebtedness" refers to a place you live "most of the time", and mentions nothing about having to live there 2 years. The 2 years is just the threshold for excluding the capital gain (as if we were lucky enough to have one). This is just my understanding from my conversations and readings. Now in terms of your question, it is very interesting. I can't find a single case on it, nor can I find any tax guidance. I submitted it to a legal friend of mine and will follow up with you. But, the spirit of the principal residence rule is that you are not allowed to exclude COD on investment homes, vacation homes, etc. By limiting to where you spend most of your time, you only get one home to call a principal residence at one point in time. I believe that if you rent after you move out and then get foreclosed on, even if the difference in time is several months, you acquired the principal residence indebtedness to acquire your principal residence at the time. Since you don't own another home currently, it would seem to me that you would qualify. At least that is my very basic belief, not an expert opinion in any way. Until a case is formally heard by the tax court, I think a lot of these exceptions are going to be open to interpretation. If you read the actual law that created MFDRA, you will see that it specifically calls out that principal residence is to be defined as it is in section 121 of the tax code. However, while section 121 lays out the rules for excluding capital gains on home sales, it simply doesn't specifically define a principal residence in straight up language. Wish I could be more helpful. Hope to have more info soon......