Legal Question in Real Estate Law in California

You will have a difficult time selling the condo for any amount less than the balance owed on the mortgage without the lender's agreement to accept the net proceeds of sale in return for release of the mortgage.

Whether the balance still owed to the lender after the sale (assuming the lender cooperates) constitutes taxable income to you (the borrower) depends on a number of factors, the first of which is whether the lender agrees to forgive that debt. If the lender forgives the debt, you have "forgiveness of debt" income, which is taxable unless you can find an exemption that applies to your situation. If the lender does not forgive the debt, there is no forgiveness of debt income and you may still owe the debt.

Either way, more facts and personal consultation with an attorney are needed to determine whether any exemptions apply to your situation.

This should perhaps have been asked as a Nevada law question. Although it maybe mainly concerns Federal tax law, i.e. the forgiveness of debt as income issue, it lookstome as though you are looking at a Nevada foreclosure, short sale and/or loan default, and the way Nevada treats deficiencies in foreclosure may determine whether the unpaid debt is forgiven or becomes a liability for a deficiency. Since this is income property it may be that you aren't protected by any antideficiency provisions. Also, when ownership changed from personal to LLC in 2008, did you refinance, or have the name of the borrower changed from yours to the LLCs with the cooperation of the lender? If you just transferred the property without consulting the lender, that may create a problem. I suggest that you re-ask the question as one falling under NV law and include some facts about how you handled the loan in connection with the change of ownership. My hunch is that your problem will not be a tax liability so much as a lender liability.