In Dec. 2005 I bought an investment property in Arizona for $240K. I live in California. The house sat vacant the first half of 2009 so I couldn't pay the $1,900/month mortgage so I had to walk away. (The house was rarely leased from the time I bought it due to a real estate fraud.) My broker got a short sale offer of $86K, but Aurora Loans rejected the offer and instead foreclosed in Feb. 2010. Aurora issued me a 1099 A that stated the debt is $192K and the fair market value as $92K. No 1099 C has been issued. Several questions here: (1) Please explain to me how this works as to me paying taxes on an investment property that never made a profit -- please give me examples; (2) If and when a 1099 C is issued, how much tax will I owe? (3) Could I take out bankruptcy protection if the tax bill is too high? (4) Because Aurora Loans refused the good faith short sale and chose instead to foreclose, shouldn't Aurora be more on the hook than me as to any "income" as I did have a legit short sale offer and it was Aurora's decision, and not mine, to reject it. I live in a house where I'm having no problems paying the mortgage. I'm nearly 63 years old and can't start over if I lose my California house because of this problem. The investment property in Arizona was part of a real estate scam and I was one of many victims. Think TWICE before getting involved with Marshall Red**** and Brewer Caldwell. Thanks for your help.

The Form 1099-C determines any potential tax liability. Until you get that form, you need to just sit tight.

The imputed income from the 1099-C is taxed as ordinary income.

As for whether bankruptcy will shield you from the tax liability, that is a LEGAL question best posted on the LAW forum or, better yet, submitted to a bankruptcy attorney.