Kagster – If I understand correctly, the buyer purchased the rental property using a loan from their primary residence. Did they also take an additional loan out on the rental property.

Can you clarify how much loan is on each property ?

This is an important point. The bank only cares about the loan attached to the property being sold. If your friend took a second loan on their primary residence (e.g. for the downpayment) than that loan is not considered in the short-sale or foreclosure discussion for the rental property.

I’m not a CPA or related, but have purchased and sold rental properties and have studied the tax consequences.