I live in California and recently did a short sale (Nov. 2010) on my investment property in Florida. The house sold for $75,000 and I owed $370,000. I got a 1099-C from the lender. am thinking about filing for insolvency to avoid the tax
bill from the 1099-C. I have very little in savings ($5k), I have two cars 10 years old each (both paid off), my primary residence value is $150k below what I owe on the first loan, I am negotiating with the lender to settle the second loan on my primary residence for about 5-10% of what I owe (currently $150k), and I actually had a foreclosure on my other investment home in Florida in Oct. 2009.
-Would it be adviseable to go the insolvency route for tax year 2010?
-Is the combined $350,000 in 401k funds my wife and I have at risk?
-What impact does current salary have on filing for involvency?
-Is it as simple as Filing IRS Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, with your tax return and sending the IRS a detailed letter with a financial statement showing your insolvency?