The subject of a 1099-C (cancelation of debt income) has been well covered in various posts. Given the taxpayer is insolvent, this income can be forgiven. There's also the Mortgage Forgiveness Debt Relief Act option for primary residences that is available.
I have a client who short sold rental properties. The client is insovlent and was told by his attorney that he won't have to worry about taxes. In reviewing his documents, I told the client that he still has to report capital gains on the sale of the property as well as recapturing depreciation that he has taken over the years. This will result in a tax liability.
Now the client is upset and thinks I'm doing something wrong. Am I missing something?