Scenario: a piece of rental property owned by someone who reported the income/expenses on Schedule E is lost in foreclosure. The property was originally purchased at $175,000. Bank foreclosed on a loan balance of approximately $165,000. Bank bought the property at auction at $110,000, and a month later resold it at $115,000.

The foreclosing bank has not yet sent a 1099-C and I am not sure if it will. If it does, does the 1099-C get reported as income, if so what kind (Schedule E? or forgiven debt?). Is the difference between purchase price and eventual foreclosure value eligible for insolvency exemption consideration? Or, could it be considered a capital business loss since it was effectively "sold" to the bank for much less than it was originally placed in service.

Can anyone recommend a source at www.irs.gov to research these scenarios? To further complicate things, this was originally the owner's primary residence, but placed into service as rental property about 1 year after the purchase.

Thank you in advance for the help.