Did a Deed in Lieu of a rental condo I owned in Naples, FL area. Got a 1099-a from BofA. Box 2 - Balance of Mtg $204K. Box 4 - FMV shows $350K. Box 5 checked Yes for personally liable. Owned the condo since 2005.

Question is - If I get my marginal tax rate down to the 15% bracket... am I understanding correctly that I will pay NO taxes on the "perceived gain" shown on the 1099-a. Also, how does the depreciation I took over the past 3 years on the condo work in a situation like this?

You may have to report sale on schedule D (Form 1040). When you add the capital gains, it may take you to higher tax bracket.

You will get 1099-C for $204K-- debt canceled, which is your income.
You can exclude gain of up to $250K if you owned your main home for two years and lived for two years in past five years, then you can exclude gain of up to $250,000. If you are eligible to exclude the gain, you do not report it on the tax return. Your U.S. Tax Return: Profit From the Sale of Your Home (http://taxipay.blogspot.com/2008/03/profit-from-sale-of-your-home.html)

And then there is Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt of recourse loan on their principal residence. Your U.S. Tax Return: Foreclosure or Repossession of Main Home (http://taxipay.blogspot.com/2008/08/foreclosure-or-repossession-of-main.html)

Still you should consult a tax professional.

I don't think you will receive a 1099-C, as the fair market value number is greater than the principal amount outstanding. Hence you effectively sold your condo for $204K, even though it was worth $350K. The 1099A is for information purposes.

However, since apparently this was a rental property (I assume that's why you took depreciation on it in previous years) you will have to report the sale, and your cost basis is adjusted downward by the amount of depreciation you have taken over the years . Consequently you may indeed have a capital gain.

The information that Mukata gave regarding exclusion of gains and the debt reliefd act implicatons apply only to your primary residence, so doesn't appear relevant in your case.