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The form 1099-A reports the disposition of properties but do not report the forgiveness of the debt.You should report that transaction as if you sold the property at its fair market value.The FMV is reported to you in the box 4.If that was your primary home for at least two and the gain is less than $250,000 - you do not need to report it.
Again the form 1099-A reports just the disposition of the property. It doesn't report if the debt was canceled. If your debt was canceled - you should receive the form 1099-C - here how this form looks - www.irs.gov/pub/irs-pdf/f1099c.pdf
If you expect the debt to be canceled - you need to contact the lender and verify why the form 1099-C was not issued.
This doesn't really help...I have read a ton on the form. My question is ...How can they say the FMV is $318 when clearly they only sold the property for $204? If we were able to sell the home for the FMV we wouldn't have foreclosed.
That is a question to them - how they determined the FMV. But I do not think that should be your concern - because that was your primary residence - there is no taxable income for you.
Your concern should be not to miss the form 1099-C - because the amount of debt forgiven is generally treated as a taxable income unless you claim an exemption on your tax return.
Most likely that the person who was responsible for issuing the form 1099-A had no knowledge about the real value of the property and simply put the amount of the mortgage outstanding plus some selling expenses. But that is just a guess as we may not know why the bank reported that amount.