My client and his wife received the same 1099-C (community property state). They had a home mortgage modified, but it comes with an interesting "twist". They moved into their house in February 2007, and were forced to move out in November/December 2009. The bank would not agree to a short sale, and the house sat vacant for 5 years. In late 2014 they were notified that as part of a settlement with BOA over mortgage and/or lending issues, they qualified for basically a "forced" mortgage modification. They subsequently met the requirements of the program and were awarded a substantially modified mortgage in March of 2015. They received a 1099-C as expected, but here's the rub; in accordance with IRC 108 and 121, "qualified principle residence" is basically determined by the same rules that allow the exclusion of gain on the sale of one's home. Since they were forced out of their home in 2009, the 2 out of the last 5 years reference the exclusion is an issue (The "use" section. Since ownership theoretically did not change hands, that part may be defendable). I understand the spirit of the rules for exclusion, but considering the timelines were controlled by the legal issues of the bank, it's very hard to comprehend the taxpayers being held responsible on a technicality. The amount of taxes that would be due is substantial (100k or so), and would put them in a situation worse than before. I would certainly appreciate anyone's thoughts on this issue. Thanks!