Based on your numbers, your client does not have canceled debt (mortgage 384893 FMV 510000) You just fill out the worksheet, and no 982 required. It is as if your client sold his home to the bank for a loss. When the bank does sell the property if less than 384893 then he will receive a 1099c. When you get to part 3 of the worksheet consider it a short sale. It works if you fill out the entire worksheet correctly