The rental property will not qualify for capital gains tax exclusion under the Mortgage Cancellation Tax Relief Act, which is scheduled to expire at the end of 2012 and which applies only to one's principal residence. Therefore, the figures you state suggest a maximum capital gain of $75,000. Of course, that potential gain amount will be reduced by any closing costs, appraisals fees, attorney fees, real estate fees, and other costs associated with any short-sale or preparing the property for short sale. Don't forget to increase your basis for any improvements over the time you had the property. One obvious strategy to reduce the capital gain tax would be to sell any marketable securities that might generate a capital loss prior to the closing. Do you have an investment portfolio that might be able to generate a capital loss? Any loss realized would of course be an offset to the capital gain from the rental property. Do you have any loss carryforwards from prior years? Don't forget that there may very well be an additional issue involving recaptured depreciation. Can't tell from the facts but I suspect you have taken depreciation deductions on prior returns. A final thought is to turn the property into your principal residence ,if you can hold the bank at bay that long.
You will have a capital gain equal to the revenue received on the property, less its tax basis as adjusted for depreciation allowed or allowable, an adjustment to basis for debt forgiven, and less any commissions and closing costs. If you made any improvements to the property this will add to the basis. You can use other capital losses you had during the year to offset these capital gains.
Any individual seeking legal advice for their own situation should retain their own legal counsel as this response provides information that is general in nature and not specific to any person's unique situation. Circular 230 Disclaimer - Advice given in this response cannot be used to eliminate penalties with the IRS or any other governmental agency.