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1099-c for settlement of 2nd mortgage and insolvent with a home office

We recieved a 1099-c for 54k (which is a portion of my HELOC with balloon that we settled for a fraction of the cost because the house we originally purchased in 2006 for 432k is worth 300k). I have had a home business and taken depreciations each year since 2006 for 280 square feet of 2400. With the exception of the home office, the cancellation of debt would easily be excluded from out income, but with the home office both TaxCut and H&R Block online tell me to get lost. Any suggestions of the paperwork I need to fill out?
    Any amount you have had depreciated, has already had the tax advantage treatment. So it would be subject to be taxable now.
    • I understand. I realize it gets muddy here, but the amount that has been "cancelled" was never included in my depreciation. Allow me to explain:

      The adjusted basis that I used for 2009 (first year claiming home office depreciation) did not include this second mortgage amount because I was working through the settlement and wasn't paying and money to the second mortgage so I had already adjusted it prior to taking the depreciation. I had expected to eventually get the settlement go through.

      Basically, my adjusted basis was calculated as:

      $365,000 - Principal of first mortgage only
      + $15,000 - Improvements
      = $380,000 - Adjusted Basis that was used in 2009 and will be used in 2010 plus additional improvements

      This is without the second mortgage (that was settled in 2010 for which this 1099-c is for). Do I even need to worry about the home office (and then not taking a deduction in the adjusted basis) raising a red flag?

      I feel like since I will be claiming insolvency and releasing myself of the debt, the fact that I will not be adjusting the balance further and will not be recapturing any depreciation will raise cause for concern.

      I was going to just forge ahead with the TurboTax filing and ignore the home office "problem" since it wouldn't (in my estimation) result in a recapture or penalty.

      Thanks in advance.
    • I added some info in the comments above. Thanks in advance!