Q. We lost our home in foreclosure last year, and are now happily full timers. I thought our worries were over, however, I just received a 1099-C in the mail for the amount of loan forgiveness, that is well over $175,000. Am I really expected to pay tax on this amount? We don't have that kind of money!
A. There are 3 possibilities here: 1) If you also had to file for bankruptcy, you will owe no tax on this amount. 2) If you can prove insolvency, (see Form 982) you may be able to reduce the tax attributes as if it were discharged in a bankruptcy, and the one I like best, 3) If you truly had to abandon the property which was your residence and it was taken over by the bank, you may qualify under Code Section 121, the Qualified Principal Residence exclusion, assuming the property meets all the criteria for a qualified principal residence.
These issues are complex, need to be fully explored, and definitely are not for the self preparer. Find a competent preparer who is knowledgeable in these areas!