Hi again, and thanks for your patience.
982 does, as you have read, two things. One, you can use it for tax non-recognition if you qualify, such as for a homeowner with a second mortgage that the bank forgives, but the homeowners did not sell. The second is the formula for reduction of tax attributed before a sale, which is your situation.
Your debt forgiveness will be used to reduce the tax basis of the property you purchased, as follows:
Purchase price - debt forgiveness 1099 = new basis in property. Then you take that to 4797 to determine gain/loss, with depreciation recapture and gain/loss at that point.
The 982 will allow you to follow the example on page 7 of the publication 4681 ( http://www.irs.gov/pub/irs-pdf/p4681.pdf) I mentioned above. Just use 982 for the basis reduction, and then take the sale transaction
to form 4797, page 2 for gain/loss determination.
We can only offer general advice here at JA, but the example I cited applies to you, since you do qualify for the real property business indebtedness relief and the example Curt uses in the publication.
This relief converts the debt forgiveness from ordinary to capital, if appropriate, and is subject to the lower capital gains rates
(after the depreciation recapture).
Please try the 982 form, following the example to elect to reduce the basis in your sold property. You will not need to complete much of the form, just the basis reduction, which will carry over to your 4797.
Thanks again from Just Answer/Pearl.