Investor ponders short sale’s long-term risks

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Q: I owned a parcel of raw land as investment property in Arizona until last month, when I sold it via a short sale. My $230,000 1099 is en route. My battle with the IRS will start in 10 months ... fun! I've researched it and found that Arizona is a non-recourse state, but that doesn't apply for the investment property. Any advice? --D.S. in California A: Hmmm. Raw land, huh? Well, recourse vs. non-recourse (the issue of whether your lender can/will sue you for the deficiency) is a different but slightly overlapping issue from the tax issue (whether the state or Internet Revenue Service will impose tax on cancellation of debt income (CODI). So, first, let's tackle the recourse issue. Now, you're correct that Arizona's non-recourse rule does not apply to your situation because the property was an investment (as opposed to your personal residence). That means that technically the lender could sue you for the deficiency -- the difference between what you owed on the property a...