In your case,since this was recourse debt,you are considered to have sold the property for the Fair Market value of the property as shown on the 1099-C. The difference between the Fair Market value on the 1099-C and your cost basis is considered a capital gain. You would enter all this as the sale of your home, and can exclude gain on up to $500,000 for a married joint couple,if you owned and lived in the house for 2 years prior to the "sale". Keep the 1099-C for future reference but enter all the amounts under Sale of Home.
