First of all - you should have debt forgiven.
The amount of debt forgiven is reportable on 1099-C - http://www.irs.gov/pub/irs-pdf/f1099c.pdf - generally is taxable, unless any exemption apply -- you should file a form 982 - to proof your exemption - and might exclude all or part of canceled debt from taxable income.
Form 982 - www.irs.gov/pub/irs-pdf/f982.pdf
specifically - for rental property - check the box 1(d) - Discharge of qualified real property business indebtedness
, and put the forgiven amount on the line 2 and on line 4.
You should also reduce the basis of your real property by the amount excluded. Part II of form 982 is to reduce tax attributes.
Form 4797 - http://www.irs.gov/pub/irs-pdf/f4797.pdf - is to report the disposition of business property - rental property in your situation.
The foreclosed property is treated as if you sell the property for its far market value (FMV)
To calculate your gain or loss - you will use an adjusted basis reduced by the amount of debt forgiven.
Let me know if you need any help.
ok. i understand completely and will accept your answer after you clarify if I will b filing this in 2011 or I have to wait till 2012,