Thanks for asking your question! I'm sorry to hear about your tax
issue and I'm going to try my best to help you understand or resolve it.
Thank you for your question, and thanks for using JustAnswer.com. The amount of debt that qualifies for the exclusion is the amount on the 1099-C - but to the extent that your liabilities exceed your assets immediately prior to the discharge. So, if your liabilities exceed your assets by at least $58,658 then you could exclude the entire amount.
If I understand you correctly, you would have sold this house to a customer, so it's property held for sale. You can treat this as depreciable property by checking "yes" on line 3 of Part 1.
The portion that you are confused about is the Part II where you reduce your basis in the asset. You will take the canceled debt and first use it to reduce any net operating loss that you may have for your business on line 6. If none, move to line 7. If you don't have business carryover credits, then move on to line 8. If you don't have a minimum tax credit, move on to line 9. On line 9, reduce any capital loss that you may have by the debt canceled. If your loss is less than the debt canceled, then you would only put the amount of the capital loss on this line. The remainder would go on line 10a.
If you had no capital loss then on line 10a you would put the LESSER of:
1) the amount on line 2 which is non business bad debt
2) the amount by which your liabilities exceed your assets AFTER the discharge
3) Your basis in depreciable assets
If you still had debt left over, you would skip line 11 as you are not a farm. Line 12 would reduce your passive activity losses and line 13 would reduce your foreign tax credit. It's rare to get that far down the list.
I know it's a difficult schedule. I hope this information has been helpful to you. Please let me know if you need anything additional. Thanks again for using JustAnswer.com and have a great day.
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You should be aware that your question, as with most tax questions, can never really be answered completely...addressing all the permutations; that is because of the many assumptions that have to be made I have done my best to determine what I think you are asking and answering it in the most direct and understandable manner possible. If, however, after reviewing the questions, you have any uncertainties or further questions, please do not hesitate to ask.