“How & where do we file this on our return?”=======> Please read below.
“Are we responsible for the difference?”======> UNLESS you had stopped renting it before the year it was foreclosed on in 2008, I guess, the rental property is reported on form 4797, not sch D/8949. If you ever used this property for your main home, you must determine what part of the loss occurred before you converted it to rental property that part of the long term capital loss is not deductible; capital loss on primary home is not deductible.
“I don't know where to turn.”===========> Since you, as a borrower ,benefit from the amount the business gains to settle the loan by acquiring property that secures a loan or taking responsibility for abandoned property. You no longer have an obligation to pay the lender, but do have an obligation to report loan amounts that will not be repaid as income. Filing a 1099-A informs both the IRS(your lender files Form 1099-A Copy A with Form 1096 (Form 1096 is the transmittal document for filing the IRS copy) and you on the debt amount that is released. The information on Form 1099-A will likely be needed to report the foreclosure on your tax return. A foreclosure is treated as the sale of property, and you will need to calculate your gain or loss on the property. But unlike a normal sale, there's no "selling price," and this is where the Form 1099-A comes into play. Under the rules for calculating the tax consequences of a foreclosure, you will need to report the foreclosure just like it were a sale of the property. And to properly report this, you'll need to know the selling date and selling price of the property. Form 1099-A provides you with the date of sale and the "selling price" of the property, which is half the information you need to report the sale of the foreclosed property on your tax return. The other half of the information you need is the purchase date and purchase price; and that information will be found in your escrow statements from when the property was purchased.Figuring out the "selling price" of the property is a bit complicated. The answer depends on the type of loan. You will utilize either the FMV of the property or the outstanding loan balance on the property for the selling price. Both of these figures are reported on Form 1099-A. The outstanding loan balance is found in Box 2; the property's FMV is found in Box 4. The date of the foreclosure is indicated in Box 1, and this will be used as the date the property was disposed of (that is, the "sale date"). You will also need to know if the loan was a recourse or a non-recourse loan; the loan was a recourse loan as the bank has checked yes in Box 5.I guess this is NOT your case , however,borrowers might also receive Form 1099-C instead of Form 1099-A if the lender both foreclosed on the property and canceled any mortgage debt for which the borrower was personally liable. So what do you do with Form 1099-A, exactly? THIS IS NOT YOUR CASE; NOTE; as long as the foreclosed property was your personal residence, the foreclosure will be reported on Sch D/8949. You'll use the date of the foreclosure (found in box 1 of the 1099-A) as your date of sale. You'll need to indicate the selling price. This will be either the amount in box 2 or the amount in box 4. Which figure you'll use depends on the lending laws in the state where the property was located. You'll also need to indicate your purchase price or cost basis in the property. That information you should have in your records, usually from the HUD-1 closing statement from when you purchased the property. The difference between the selling price and your cost basis will result in your gain or loss. Gains are taxable, losses personal residences are not tax-deductible as mentioned previously.
YOUR CASE: Since the property was a rental, you'll report the same information as above, but you'll use Form 4797. I guess you can contact a tax pro in your local area( for your fed/state returns )for professional help as there are additional factors to take into consideration, such as recapture of depreciation deductions, passive activity loss carryovers, and reporting any final rental income and expenses. The difference between the box 2 and box 4 amounts is not your taxable income or gain on the foreclosure. State law determines whether the amount in box 2 or the amount in box 4 is used as your selling price, and your gain or loss is computed with respect to your cost basis in the property. By itself, Form 1099-A reports only half the information you need to report the foreclosure on your tax return. You will also need information from your own records. I guess you do not need to recapture depreciation recapture since you took a loss on the rental pty.