I am a US Public Health Service member on extended active duty. My husband and I bought a home in California on April 12, 2005 and lived there until October 2009 when we moved to Georgia on USPHS orders. We converted the house to a rental on Feb 10, 2010 as a temporary measure , hoping to move back into it as our main home later. Purchase price was $510,000. Fair market value that we used for depreciation when converted was $304,000. We took $15,652 depreciation while it was rented. The renters moved out in 2012, and the house was sold by the bank July 16, 2013 for $365,000 on a short sale because we could not make the payments with the renters gone. We did not report the sale on our 2013 return because we thought it qualified as our main home, and we had a loss anyway. Now we have a letter from California taxing us on the $365,000.
I have read in Publication 3 that service members can suspend the 5 year ownership/use period while on extended active duty, and that some of the tax benefits received by members of the armed services can be received by members of USPHS. Is suspension of the 5 year period available to me? If not, how do I handle the sale? What do I use as my basis in the house? I also got a form 1099c for $108,977 on the short sale. How do I handle this? Does this qualify for personal residence debt forgiveness?